Use these links to rapidly review the documentACUSPHERE, INC. Form 10-Q For the Quarterly Period Ended September 30, 2007 CONTENTS



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended September 30, 2007            
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission File Number 000-50405

ACUSPHERE, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)              |  | 04-3208947(IRS Employer
Identification No.)
|----------------------------------------------------------------------------------- |  | -------------------------------------------
|500 Arsenal Street
Watertown, Massachusetts(Address of principal executive offices) |  | 02472(Zip Code)                            

Registrant's
Telephone Number, Including Area Code:(617) 648-8800

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large
accelerated filer o        Accelerated
filer ý        Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes o No ý

As of November 5, 2007 there were 46,273,945 shares of the registrant's common stock, $.01 par value per share, outstanding.



---





ACUSPHERE, INC.        Form 10-Q  For the Quarterly Period Ended September 30, 2007        CONTENTS



|                                                                                              |                                                                                                                | Page
Number
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | -----------
|PART I: FINANCIAL INFORMATION                                                                 |                                                                                                                | 3          
|Item 1. Consolidated Financial Statements                                                     |                                                                                                                | 3          
|                                                                                              | Consolidated Balance Sheets:
    September 30, 2007 (Unaudited) and December 31, 2006                          |            
|                                                                                              | Consolidated Statements of Operations (Unaudited):
    Three and Nine Months ended September 30, 2007 and 2006 |            
|                                                                                              | Consolidated Statements of Cash Flows (Unaudited):
    Nine Months ended September 30, 2007 and 2006           |            
|                                                                                              | Notes to Consolidated Financial Statements (Unaudited)                                                         |            
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                                | 19         
|Item 3. Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                                                | 40         
|Item 4. Controls and Procedures                                                               |                                                                                                                | 41         
|PART II: OTHER INFORMATION                                                                    |                                                                                                                | 42         
|Item 1. Legal Proceedings                                                                     |                                                                                                                | 42         
|Item 1A. Risk Factors                                                                         |                                                                                                                | 42         
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |                                                                                                                | 62         
|Item 3. Defaults Upon Senior Securities                                                       |                                                                                                                | 62         
|Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                                | 62         
|Item 5. Other Information                                                                     |                                                                                                                | 62         
|Item 6. Exhibits                                                                              |                                                                                                                | 62         
|Signature                                                                                     |                                                                                                                | 63         

2

---





PART I: FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ACUSPHERE, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (in thousands except share data)

|                                     |                                                | As of                                                                                                                                                                                                                                                                                                                                       |       
|------------------------------------ | ---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------
|
|
|ASSETS                               |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|CURRENT ASSETS:                      |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Cash and cash equivalents                      |                                                                                                                                                                                                                                                                                                                                             | $     
|                                     | Other current assets                           |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                | Total current assets                                                                                                                                                                                                                                                                                                                        |       
|PROPERTY AND EQUIPMENT:              |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Property and equipment                         |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Less accumulated depreciation and amortization |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                | Property and equipment, net                                                                                                                                                                                                                                                                                                                 |       
|OTHER ASSETS                         |                                                |                                                                                                                                                                                                                                                                                                                                             | 1,567 
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|TOTAL ASSETS                         |                                                | $                                                                                                                                                                                                                                                                                                                                           | 67,511
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|CURRENT LIABILITIES:                 |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Current portion of long-term obligations       |                                                                                                                                                                                                                                                                                                                                             | $     
|                                     | Current portion of deferred revenue            |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Derivative liability                           |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Accounts payable                               |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Accrued expenses                               |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                | Total current liabilities                                                                                                                                                                                                                                                                                                                   |       
|LONG-TERM LIABILITIES:               |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Long-term obligations, net of current portion  |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Deferred revenue, net of current portion       |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                | Total long-term liabilities                                                                                                                                                                                                                                                                                                                 |       
|COMMITMENTS                          |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|STOCKHOLDERS' EQUITY:                |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Preferred stock, $0.01 par value per share     |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                | Authorized5,000,000 shares as of September 30, 2007 and December 31, 2006; Designated 6.5% convertible exchangeable1,000,000 shares as of September 30, 2007 and December 31, 2006; issued
and outstanding 690,000 shares as of September 30, 2007 and 730,000 at December 31, 2006 (liquidation value $34,500,000 at September 30, 2007) |       
|                                     | Common stock, $0.01 par value per share        |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                | Authorized, 98,500,000 shares as of September 30, 2007 and December 31, 2006; issued and outstanding 46,265,242 shares as of September 30, 2007 and 38,090,593 as of December 31, 2006                                                                                                                                                      |       
|                                     | Additional paid-in capital                     |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Deferred stock-based compensation              |                                                                                                                                                                                                                                                                                                                                             |       
|                                     | Accumulated deficit                            |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|                                     |                                                | Total stockholders' equity                                                                                                                                                                                                                                                                                                                  |       
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       
|TOTAL                                |                                                | $                                                                                                                                                                                                                                                                                                                                           | 67,511
|                                     |                                                |                                                                                                                                                                                                                                                                                                                                             |       

The accompanying notes are an integral part of these consolidated financial statements.

3

---





ACUSPHERE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (unaudited, in thousands)

|                                                     |                            | Three Months Ended       |         | Nine Months Ended |       
|---------------------------------------------------- | -------------------------- | ------------------------ | ------- | ----------------- | ------
|
|REVENUE                                              |                            | $                        | 667     |                   | $     
|OPERATING EXPENSES:                                  |                            |                          |         |                   |       
|                                                     | Research and development   |                          |         | 11,728            |       
|                                                     | General and administrative |                          |         | 3,092             |       
|                                                     |                            |                          |         |                   |       
|                                                     |                            | Total operating expenses |         |                   | 14,820
|Interest income                                      |                            |                          | 629     |                   |       
|Loss on extinguishment of debt                       |                            |                          |        |                   |       
|Interest expense                                     |                            |                          | (490    | )                 |       
|Change in valuation of derivative                    |                            |                          | 13      |                   |       
|                                                     |                            |                          |         |                   |       
|NET LOSS                                             |                            | $                        | (14,001 | )                 | $     
|Dividends on preferred stock                         |                            |                          | (561    | )                 |       
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS            |                            | $                        | (14,562 | )                 | $     
|                                                     |                            |                          |         |                   |       
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHARE |                            |                          |         |                   |       
|Basic and diluted                                    |                            | $                        | (0.32   | )                 | $     
|                                                     |                            |                          |         |                   |       
|WEIGHTED-AVERAGE SHARES OUTSTANDING                 |                            |                          |         |                   |       
|Basic and diluted                                    |                            |                          | 46,213  |                   |       
|                                                     |                            |                          |         |                   |       

The
accompanying notes are an integral part of these consolidated financial statements.

4

---





ACUSPHERE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        (unaudited, in thousands)

|                                                                            |  | Nine Months Ended |        
|--------------------------------------------------------------------------- |  | ----------------- | -------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |  |                   |        
|Net loss                                                                    |  | $                 | (41,169
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                   |        
|Stock-based compensation expense                                            |  |                   | 1,851  
|Depreciation and amortization                                               |  |                   | 7,583  
|Loss on disposal of property and equipment                                  |  |                   | 249    
|Write-off of intellectual property acquisition cost                         |  |                   |       
|Loss on extinguishment of debt                                              |  |                   | 1,146  
|Noncash interest expense                                                    |  |                   | 657    
|Noncash rent expense                                                        |  |                   | 8      
|Noncash amortization of deferred revenue                                    |  |                   | (2,000 
|Noncash amortization of fee and warrants to financial advisor               |  |                   | 168    
|Noncash change in valuation of derivative                                   |  |                   | 106    
|Changes in operating assets and liabilities:                                |  |                   |        
|Deferred revenue                                                            |  |                   |       
|Other current assets                                                        |  |                   | (66    
|Accounts payable                                                            |  |                   | (116   
|Accrued expenses                                                            |  |                   | 964    
|                                                                            |  |                   |        
|Net cash used in operating activities                                       |  |                   | (30,619
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                   |        
|Purchases of property and equipment                                         |  |                   | (769   
|Increase in other assets                                                    |  |                   | 24     
|                                                                            |  |                   |        
|Net cash used in investing activities                                       |  |                   | (745   
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                   |        
|Payments on long-term obligations                                           |  |                   | (6,897 
|Proceeds from long-term obligations                                         |  |                   | 901    
|Net proceeds from sale of stock                                             |  |                   | 18,698 
|Payment of preferred stock dividends                                        |  |                   | (1,714 
|Proceeds from exercise of stock options                                     |  |                   | 97     
|Proceeds from issuance of common stock from employee stock purchase plan    |  |                   | 39     
|                                                                            |  |                   |        
|Net cash provided by financing activities                                   |  |                   | 11,124 
|                                                                            |  |                   |        
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |  |                   | (20,240
|CASH AND CASH EQUIVALENTS, Beginning of period                              |  |                   | 59,750 
|                                                                            |  |                   |        
|CASH AND CASH EQUIVALENTS, End of period                                    |  | $                 | 39,510 
|                                                                            |  |                   |        

The
accompanying notes are an integral part of these consolidated financial statements.

5

---





ACUSPHERE, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (unaudited)

1.     Basis of Presentation

The accompanying unaudited consolidated financial statements of Acusphere, Inc. and Subsidiaries (the "Company"), have been prepared in accordance with
generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for
complete financial statements. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest audited annual financial
statements. Those audited statements are included in our Annual Report on Form 10-K for the year ended December 31, 2006, which has been filed with the SEC.

In
the opinion of management, all adjustments, consisting only of normal, recurring adjustments considered necessary for a fair presentation of the results of these interim periods have
been included. The results of operations for the three and nine months ended September 30, 2007 may not be indicative of the results that may be expected for the full fiscal year.

The
Company is subject to a number of risks similar to those of pre-commercial stage companies, including dependence on key individuals, uncertainty of product development
and generation of revenues, dependence on outside sources of capital, risks associated with clinical trials, dependence on third party collaborators for research operations, need for regulatory
approval of products, successful protection of intellectual property, and competition with larger, better-capitalized companies.

As
of September 30, 2007, we had cash and cash equivalents of $39.5 million. During the nine months ended September 30, 2007, operating activities used
$30.6 million of cash. We believe based on our
operating plans that unless we elect to reduce our current rate of spending and forego pursuit of milestones on our current schedule, we will, before the end the second quarter of 2008 require
significant additional funds in order to fund our operations. As a result of our limited capital resources, we may elect to delay the funding of certain development activities, which could harm our
financial condition and operating results. We may raise these funds through public or private sales of equity, or from borrowings, or from strategic partners. Our future capital requirements will
depend on many factors, including the scope and progress made in our research and development activities and the size and timing of creating expanded manufacturing capabilities. There are no
assurances, however, that the Company will be able to obtain additional financing on favorable terms, or at all or successfully market its products.

Successful
completion of the Company's development program and, ultimately, the attainment of profitable operations is dependent on future events, including obtaining adequate financing
to fulfill its development activities and achieving a level of revenues adequate to support the Company's cost structure.

The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates or assumptions. The more significant estimates reflected in these financial statements relate to revenue recognition, accrued
expenses, embedded derivatives, and valuation of stock-based compensation.

6

---



2.     Revenue Recognition

The Company recognizes revenue from license arrangements in accordance with Staff Accounting Bulletin No. 104,Revenue
Recognition("SAB 104") and Financial Accounting Standards Board ("FASB") Emerging Issue Task Force Issue No. 00-21,Accounting for
Revenue Arrangements with Multiple Deliverables("EITF 00-21"). The Company recognizes revenue from license payments not tied to achieving a specific performance
milestone ratably over the period over which the Company is obligated to perform services. The period over which the Company is obligated to perform services is estimated based on available facts and
circumstances. The Company periodically evaluates the assumptions underlying these estimates; significant changes in these assumptions could result in an adjustment to the period over which the
revenue is recognized. The Company recognizes revenue from performance payments when such performance is substantially in the Company's control and when the Company believes that completion of such
performance is reasonably probable, ratably over the period over which the Company estimates that it will perform such performance obligations. Substantive at-risk milestone payments,
which are based on achieving a specific performance milestone when performance of such milestone is contingent on
performance by others or for which achievement can not be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and the related payment is due, provided that there
is no substantial future service obligation associated with the milestone. Revenue in connection with license arrangements is recognized over the term of the arrangement and is limited to payments
collected or due and reasonably assured of collection. In circumstances where the arrangement includes a refund provision, the Company defers revenue recognition until the refund condition is no
longer applicable unless, in the Company's judgment, the refund circumstances are within its operating control and unlikely to occur. Payments received in advance of being recognized as revenue are
deferred. Contract amounts which are not due until the customer accepts or verifies the research results are not recognized as revenue until customer acceptance, assuming collectibility is reasonably
assured.

3.     Accounting for Stock-based Compensation

Summary of Stock-Based Compensation Plans

In June 2005, the 2005 Stock Option and Incentive Plan (the "2005 Plan") was approved. The 2005 Plan became effective on June 16, 2005 and provided
for a maximum of 1.7 million shares of common stock to be issued as incentive stock options ("ISO's"), nonqualified stock options, awards of common stock and direct purchases of common stock by
Acusphere employees, officers, directors and consultants. In June 2007, the 2005 Plan was amended and the number of shares available under the Amended and Restated 2005 Stock Option and
Incentive Plan (the "Amended 2005 Plan") was increased by 5.0 million shares, to a maximum of 6.7 million shares. The maximum number of shares that may be granted to any employee under
the Amended 2005 Plan shall not exceed 1.0 million shares of common stock during any calendar year. Options granted have a term of 10 years and generally vest over four years. The
Company settles employee stock option exercises with newly issued shares. As of September 30, 2007, there were 1.7 million options outstanding under the Amended 2005 Plan, and
5.0 million shares available for future stock and option grants.

In
July 2003, the 2003 Stock Option and Incentive Plan (the "2003 Plan") was approved. The 2003 Plan became effective on the closing of the Company's IPO on October 14,
2003 and provides that a maximum of 2.5 million shares of common stock may be issued as ISO's, nonqualified stock option, awards of common stock and direct purchases of common stock by
Acusphere employees, officers, directors and consultants. The maximum number of shares that may be granted to any employee under the 2003 Plan shall not exceed 583,334 shares of common stock during
any calendar year. Options granted have a term of 10 years and generally vest over four years. The Company settles employee stock option exercises with newly issued shares. As of
September 30, 2007, there were 2.0 million options outstanding under the 2003 Plan and 0.5 million shares available for future stock and option grants.

7

---



In
July 2003, the 2003 Employee Stock Purchase Plan (the "Purchase Plan") was approved which became effective on the closing of the Company's IPO on October 14, 2003. The
Purchase Plan provides for the issuance of a maximum of 233,334 shares of common stock. Eligible employee may contribute up to 10% of their total cash compensation with a maximum of 417 shares
semi-annually. The first sale of shares under this plan occurred on February 29, 2004. During the third quarter of 2007, 9,677 shares of common stock were sold to employees under
the Purchase Plan. Acusphere had 185,274 shares available for future sales of common stock under the Purchase Plan at September 30, 2007.

In
March 1994, the 1994 Stock Plan (the "1994 Plan") was approved. The 1994 Plan, as amended, provided that a maximum of 1,423,663 shares of common stock could be issued as ISOs,
nonqualified stock options and stock grants. The Company ceased granting awards under the 1994 Plan after March 7, 2004. As of September 30, 2007, there were 0.9 million options
outstanding under the 1994 Plan.

Under
the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as
expense over the service period, which generally represents the vesting period. The grant date fair value of stock options is calculated using the Black-Scholes option-pricing model and the grant date
fair value of restricted stock is based on intrinsic value. The expense recognized over the service period is required to include an estimate of the awards that will be forfeited.

All
stock-based awards to non-employees are accounted for at their fair market value in accordance with SFAS 123R and Emerging Issues Task Force
No. 96-18 ("EITF 96-18"),Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. Under this method, the equity-based instrument was valued at either the fair value of the consideration received or the equity instrument issued on
the date of grant. The resulting compensation cost was recognized and charged to operations over the service period, which was usually the vesting period.

Stock
compensation expense under SFAS 123R for the three and nine months ended September 30, 2007 and 2006 is as follows (in millions):

Three Months Ended Sept 30,

Nine Months Ended Sept 30,2007

2006

2007

2006Research & development

$
0.3

$
0.3

$
0.8

$
0.8General & administrative


0.3


0.4


1.0


1.2Total

$
0.6

$
0.7

$
1.8

$
2.0


In
accordance with SFAS 123R, the Company will report any excess tax benefits from the exercise of non-qualified stock options as financing cash flows. There were no
excess tax benefits recorded from the exercise of non-qualified stock options for the nine months ended September 30, 2007.

For
purposes of recording stock option-based compensation expense as required by SFAS 123R, the fair values of each stock option granted under the Company's stock option plan for
the three and nine months ended September 30, 2007 were estimated as of the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of all stock option
grants issued for the three month periods ended September 30, 2007 and 2006 were $0.81 and $1.64, respectively, and for the nine month periods ended September 30, 2007 and 2006 were
$1.27 and $2.17, respectively.

For
purposes of recording Purchase Plan compensation expense under SFAS 123R, the fair values of each share subject to purchase under the Purchase Plan were estimated as of the
beginning of the subscription period using the Black-Scholes option-pricing model.

8

---



The
fair values of all stock option grants issued were determined using the following weighted average assumptions:

Three Months Ended September 30,

Nine Months Ended September 30,2007

2006

2007

2006Risk-free interest rate

4.31
%
4.70
%
4.77
%
4.63
%Expected volatility of underlying stock

54.71
%
50.72
%
51.00
%
39.65
%Expected life of option grants (years)

5.0

5.0

5.0

5.0


The
fair values of options granted during six-month subscription period ended August 31, 2007 and 2006 under the Company's Purchase Plan were calculated using the
following weighted-average assumptions:

2007

2006Risk-free interest rate

4.21
%
4.88
%Expected volatility of underlying stock

54.40
%
44.32
%Expected life of option (years)

0.5

0.5


The
risk-free rates for the stock option plans and the Purchase Plan are the weighted average of the yield rates on 5-year U.S. Treasury notes on the dates of the
stock option grants and the yield rates on 6-month U.S. Treasury bills at the inception of each Purchase Plan subscription period, respectively. The Company used the historical volatility
of the Company's market-traded stock for the expected volatility assumption input to the model. A dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no
present intention to pay cash dividends on its common stock.

As
share-based compensation expense is recognized based on awards ultimately expected to vest, compensation expense is reduced for estimated forfeitures. SFAS 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeiture rates are calculated based on actual
historical forfeitures.

The
expected life of employee stock options represents the weighted-average period the stock options are estimated to remain outstanding. The expected life of employee stock options is,
in part, a function of the options' remaining contractual life and the extent to which the option is in-the-money (i.e., the average stock price during the period is above the
strike price of the stock option). The Company estimates that, based on these variables, options are likely on average to be exercised in approximately 5 years. The option life for options
under the Purchase Plan is nine months, representing the subscription period.

During
the nine months ended September 30, 2007, the Company granted stock options to existing employees, as part of the Company's performance review process, new employees and
Directors in lieu of cash based compensation. All such options were granted with exercise prices equal to the current
market value of the underlying common stock on the date of grant. Aggregate stock options granted during 2007 are as follows:

|                                               |  | Number of
Shares |  | Exercise Price
Per Share |  | Weighted Average
Exercise Price
Per Share |      | Grant Date
Fair Value
|---------------------------------------------- |  | ---------------- |  | ------------------------ |  | ----------------------------------------- | ---- | ---------------------
|For the three months ended March 31, 2007:     |  | 965,080          |  | $2.45 - $2.70            |  | $                                         | 2.61 |                      
|For the three months ended June 30, 2007:      |  | 299,275          |  | $2.10 - $3.98            |  | $                                         | 2.58 |                      
|For the three months ended September 30, 2007: |  | 77,880           |  | $1.38 - $1.97            |  | $                                         | 1.57 |                      

9

---



On
August 31, 2007, the company issued 9,677 shares of its common stock under the Purchase Plan at $1.15 per share, reflecting 85% of the average of the high and low stock price
on the first or last day of the six-month option period, whichever is lower.

Stock Options

Under the Company's policies for granting stock options to employees, employees who receive new stock option grants typically receive these grants in the early
part of each year in connection with the Company's annual employee performance and compensation review process. As a result, the level of stock options granted by the Company is typically the highest
during the first fiscal quarter of each year. The following table summarizes the stock option activity in the equity incentive plans from January 1, 2007 through September 30, 2007:

|                                              |           | Number of
Shares |          | Exercise Price
Per Share |              | Weighted
Average
Exercise
Price
Per
Share |   | Weighted
Average
Remaining
Contractua
l
Life |      | Aggregate
Intrinsic
Value
|--------------------------------------------- | --------- | ---------------- | -------- | ------------------------ | ------------ | ----------------------------------------- | - | -------------------------------------------- | ---- | -------------------------
|Balance, January 1, 2007                      |           | 3,961,118        |          | $                        | 0.84 - 13.02 |                                           | $ | 5.96                                         |      |                          
|                                              | Granted   |                  | 965,080  |                          |              | 2.45 -   2.70                             |   |                                              | 2.61 |                          
|                                              | Exercised |                  | (30,253  | )                        |              | 0.84 -   1.26                             |   |                                              | 1.15 |                          
|                                              | Canceled  |                  | (129,454 | )                        |              | 0.84 -   8.50                             |   |                                              | 6.24 |                          
|                                              |           |                  |          |                          |              |                                           |   |                                              |      |                          
|Balance, March 31, 2007                       |           | 4,766,491        |          | $                        | 0.84 - 13.02 |                                           | $ | 5.31                                         |      | 8.0                      
|                                              | Granted   |                  | 299,275  |                          |              | 2.10 -   3.98                             |   |                                              | 2.58 |                          
|                                              | Exercised |                  | (2,500   | )                        |              | 1.26 -   1.26                             |   |                                              | 1.26 |                          
|                                              | Canceled  |                  | (222,854 | )                        |              | 0.84 - 13.02                              |   |                                              | 4.36 |                          
|                                              |           |                  |          |                          |              |                                           |   |                                              |      |                          
|Balance, June 30, 2007                        |           | 4,840,412        |          | $                        | 0.84 - 13.02 |                                           | $ | 5.18                                         |      | 7.6                      
|                                              | Granted   |                  | 77,880   |                          |              | 1.38 -   1.97                             |   |                                              | 1.57 |                          
|                                              | Exercised |                  | (70,167  | )                        |              | 0.84 -   1.26                             |   |                                              | 0.84 |                          
|                                              | Canceled  |                  | (259,215 | )                        |              | 2.51 - 13.02                              |   |                                              | 5.86 |                          
|                                              |           |                  |          |                          |              |                                           |   |                                              |      |                          
|Balance, September 30, 2007                   |           | 4,588,910        |          | $                        | 0.84 - 13.02 |                                           | $ | 5.15                                         |      | 7.6                      
|Vested or Expected to Vest September 30, 2007 |           | 4,288,667        |          | $                        | 0.84 - 13.02 |                                           | $ | 5.15                                         |      | 7.6                      
|Exercisable, September 30, 2007               |           | 2,643,069        |          | $                        | 0.84 - 13.02 |                                           | $ | 6.00                                         |      | 6.7                      

The
following table summarizes information related to the Company's options at September 30, 2007:

|Exercise Price   |  | Number of
Shares |  | Outstanding
Weighted-Average
Remaining
Contractual Life (in Yrs) |  | Weighted
Average
Exercise
Price |       | Exercisable
Number
of Shares |           | Weighted
Average
Exercise
Price
|---------------- |  | ---------------- |  | ---------------------------------------------------------------- |  | ------------------------------- | ----- | ---------------------------- | --------- | -------------------------------
|$  0.00 -   1.30 |  | 311,400          |  | 5.0                                                              |  | $                               | 0.84  |                              | 311,400   |                                
|1.31 -   2.60    |  | 1,132,048        |  | 9.1                                                              |  |                                 | 2.41  |                              | 228,444   |                                
|2.61 -   3.91    |  | 366,232          |  | 8.6                                                              |  |                                 | 3.26  |                              | 202,097   |                                
|3.92 -   5.21    |  | 309,456          |  | 7.7                                                              |  |                                 | 4.68  |                              | 188,482   |                                
|5.22 -   6.51    |  | 1,499,025        |  | 7.7                                                              |  |                                 | 5.81  |                              | 838,864   |                                
|6.52 -   7.81    |  | 274,719          |  | 5.6                                                              |  |                                 | 6.98  |                              | 215,948   |                                
|7.82 -   9.11    |  | 265,545          |  | 6.4                                                              |  |                                 | 8.74  |                              | 240,813   |                                
|9.12 - 10.42     |  | 158,500          |  | 6.4                                                              |  |                                 | 9.58  |                              | 145,036   |                                
|10.43 - 13.02    |  | 271,985          |  | 5.9                                                              |  |                                 | 13.02 |                              | 271,985   |                                
|                 |  |                  |  |                                                                  |  |                                 |       |                              |           |                                
|                 |  | 4,588,910        |  | 7.6                                                              |  | $                               | 5.15  |                              | 2,643,069 |                                

10

---



The
total cash received from employees as a result of employee stock option exercises during the nine-month period ended September 30, 2007 was approximately
$0.1 million. As of September 30, 2007, the aggregate intrinsic value of fully vested and exercisable options was $15.9 million. As of September 30, 2007, there was
$3.2 million of total expected unrecognized compensation cost related to unvested stock options granted under the Company's stock-based compensation plans. That cost is expected to be
recognized over a weighted-average period of 2.92 years.

4.     Net Loss Per Common Share

Basic and diluted net loss per common share is calculated by dividing the net loss available to common stockholders by the weighted-average number of unrestricted
common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share, since the effects of potentially dilutive securities are
anti-dilutive for all periods presented. As of September 30, 2007 and 2006, anti-dilutive securities, which consist of convertible exchangeable preferred stock, stock
options, warrants, and restricted common stock that are not included in the diluted net loss per share calculation aggregated 19,435,320 and 12,309,343 shares, respectively.

The
following table reconciles weighted-average common shares outstanding to the shares used in the computation of basic and diluted weighted-average common shares outstanding:

Three Months Ended

Nine Months EndedSeptember 30,
2007

September 30,
2006

September 30,
2007

September 30,
2006Weighted-average common shares outstanding

46,213,362

28,819,307

41,410,867

26,571,694Less weighted-average unvested restricted common shares outstanding







(422
)Basic and diluted weighted-average common shares outstanding

46,213,362

28,819,307

41,410,867

26,571,272


5.     Property and Equipment

Property and equipment at cost consist of the following (in thousands):

As of:September 30, 2007

December 31, 2006

Estimated
Useful LifeEquipment

$
22,575

$
22,993

3 - 5 yearsFurniture and fixtures


470


424

5 yearsLeasehold improvements


31,180


31,030

Lease term
(a)Sub-total depreciable assets


54,225


54,447Less: accumulated depreciation and amortization


(29,074
)

(22,054
)Total depreciable assets, net


25,151


32,393Deposits on equipment purchases


376


60

n/aTotal property and equipment

$
25,527

$
32,453




Leasehold
improvements primarily represent costs incurred for the build-out of the Company's commercial manufacturing facility in Tewksbury, Massachusetts,
which are being depreciated over the

11

---



initial
lease term. Deposits on equipment purchases generally represent progress payments made for long-lead time capital equipment purchases. Depreciation on leasehold improvements to
this commercial manufacturing facility commenced in October 2005, at which time the Company received an occupancy permit and began operating use of the facility. Included in leasehold
improvements at September 30, 2007 and 2006, prior to accumulated depreciation and amortization, is capitalized interest in the amount of $813,000 related to the construction of the facility.

6.     Intellectual Property

The Company expenses intellectual property costs incurred in obtaining license rights and patents rights to technology or products for which technological
feasibility has not been commercially demonstrated and no alternative future use has been shown to exist. No amount has been capitalized by the Company relating to the costs of intellectual property
developed or acquired by the Company.

On
June 1, 2006, the Company entered into an agreement to license on a non-exclusive basis various ultrasound-related intellectual property from GE Healthcare ("GE"),
a division of General Electric Company. In consideration of the non-exclusive license of these patents, the Company agreed to pay GE $10.0 million prior to commercial approval of
Imagify, of which $5.0 million was paid in June 2006 and $5.0 million was due in June 2007. In addition, the Company agreed to pay GE $5.0 million upon the
commercial approval of Imagify (defined as the first to occur of the approval of a New Drug Application in the United States or the approval of a Marketing Authorization Application in Europe) and
$5.0 million upon the one year anniversary of such commercial approval. For accounting purposes the Company has not demonstrated technological feasibility or an alternative future use for these
patents. Therefore, $9.5 million was expensed upon the consummation of the agreement, representing the initial $5.0 million June 2006 payment and the present value of the
$5.0 million payment initially due in June 2007. The latter two $5.0 million payments are contingent upon achievement of future milestone events and, accordingly, have not been
recorded at this time. Effective May 11, 2007 the Company entered into an amendment (the "Amendment") to the GE patent license agreement. The Amendment provides that, in lieu of this
$5.0 million payment due on June 1, 2007, the Company agreed to make a series of payments as follows: $1.5 million was paid in May 2007 and six consecutive quarterly
installments of $0.9 million due on the first day of the third month of each calendar quarter, commencing June 1, 2008, for a total amended amount payable, including interest, of
$7.0 million. In May 2007, $1.5 million was paid to GE and $1.7 million has been included in the current portion of long-term obligations at September 30, 2007.
As the present value of the revised cash flows exceeds 10% of the original cash flows, the modification of the terms has been accounted for as a debt extinguishment. As a result of the debt
extinguishment, the Company recognized $1.1 million in other expenseextinguishment of debt, during the
second quarter of 2007, representing the present value of the modified payment terms. The difference between the present value of the modified liability and the actual cash payments due, or
approximately $0.9 million, will be amortized as interest expense over the remaining term of the liability using the revised effective interest rate.

On
May 11, 2005, the Company entered into a Patent Transfer Agreement with Bayer Schering Pharma AG ("Schering") pursuant to which the Company acquired rights, title and interest
in certain ultrasound-related patents from Schering. In consideration of the transfer and assignment of these patents, the Company agreed to pay Schering a total of $7.0 million of which
$1.0 million was paid in May 2005, $3.0 million was paid in May 2006, and $3.0 million was due in May 2007. For accounting purposes the Company has not
demonstrated technological feasibility or an alternative future use for these patents and the present value of the initial acquisition cost, $6.2 million in total, was expensed in
May 2005 at the time of acquisition. Effective April 27, 2007 the Company entered into an amendment (the "Amendment") to the Patent Transfer Agreement. The Amendment provides that, in
lieu of this final $3.0 million payment due in May 2007, the Company agreed to make a series of payments as follows: $1.5 million was paid in May 2007; $1.0 million
is due in May 2008 and $1.0 million is due in

12

---



May 2009.
The $1.0 million payment due in May 2008 has been included in the current portion of long-term obligations at September 30, 2007. The difference
between the present value of the modified liability and the actual cash payments due, or $0.5 million, will be amortized as interest expense over the remaining term of the liability.

7.     Long-term Obligations

The carrying value of long-term obligations is as follows:

September 30, 2007

December 31, 2006Capital lease obligations

$
74

$
93Notes payable


11,534


14,485Other long-term obligations


6,470


7,70218,078


22,280Less current maturities


(7,931
)

(12,899
)Long-term obligations, net

$
10,147

$
9,381


Capital Lease Obligations

The Company leases capital equipment through Banc of America Leasing Corporation. The remaining monthly payments range from $460 to $1,019 with maturities through
June 2010. Interest rates for the above leases range from 7.3% to 9.4%. Acusphere does not have any additional borrowing availability under these lease arrangements as of September 30,
2007.

Notes Payable

Equipment Promissory NotesIn 2004 and 2005, the Company borrowed an aggregate of $10.5 million
under an equipment financing line with General Electric Capital Corporation. In January 2006, the line was amended and the availability was increased by an additional $3.5 million and
was extended through May 2007. During the nine months ended September 30, 2007, the Company borrowed an additional $0.9 million, no additional amounts may be borrowed under this
line. Borrowings are collateralized by the equipment financed, with repayment due in monthly installments over 36 to 48 months, with the last such repayment scheduled for December 2010.
Interest rates on these borrowings were fixed at the time of each borrowing and range from 8.7% to 10.7%. The loans under this line are subject to acceleration upon certain events of default,
including failure to make timely payments of principal and interest. As of September 30, 2007, net of repayments, the Company had $5.6 million outstanding under the line.

In
2005 the Company borrowed an aggregate of $7.0 million under an equipment financing line with Oxford Finance Corporation. As of September 30, 2007, net of repayments,
the Company had $3.9 million outstanding under the line. Borrowings are collateralized by the equipment financed, with repayment due in monthly installments over 36 to 48 months, with
the last such repayment scheduled for March 2010. Interest rates on these borrowings were fixed at the time of each borrowing and range from 10.3% to 10.9%. No additional amount may be borrowed
under this line.

Facility Loan AgreementIn March 2005 the Company borrowed $2.0 million under a loan agreement with
MassDevelopment to help finance certain tenant improvements to its commercial manufacturing facility in Tewksbury, Massachusetts. The loan is secured by certain improvements made at the facility,
interest accrues at 5.0% per annum with retroactive adjustments to 9.0% in the event the Company achieves positive operating cash flow, as defined in the agreement, prior to repayment of the loan. The
repayment of principal and accrued interest coincides with the term of the Tewksbury lease at the time of the loan, which was five-years, nine-months with options to extend the
lease for up to two additional five-year terms. Accrued principal and interest are being repaid on a monthly basis such that the total amount outstanding fully amortize over the balance of
the term in equal installments.

13

---



The
loan is subject to acceleration upon certain customary events of default, including failure to timely pay principal and interest. Acusphere began making payments on this loan in May 2007
and as of September 30, 2007, has $2.1 million outstanding under the loan, including principal and interest.

The
retroactive interest rate adjustment feature of the loan agreement was deemed to be an embedded derivative instrument requiring separate accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and was initially valued at $62,000. The discount generated from the valuation from the
embedded derivative is being amortized as interest expense over a term beginning with the loan agreement effective date and ending with the currently expected payment date of the retroactive interest.
The fair value of the derivative liability is re-measured at each reporting period, with any change in value charged or credited to interest expense.

Amounts Due Under Intellectual Property Agreements

Under the Company's amended Patent Transfer Agreement with Schering, a $1.0 million payment is due in May 2008 and $1.0 million is due in
May 2009. Under the Company's amended License Agreement with GE, the Company is scheduled to make six consecutive quarterly payments of $0.9 million due on the first day of the third
month of each calendar quarter, commencing on June 1, 2008. As of September 30, 2007, the Company has included $2.7 million in the current portion of long-term
obligations, representing payments due under the GE and Schering agreements within the next twelve months.

8.     Deferred Revenue

In July 2004, the Company entered into a collaboration, license and supply agreement with Nycomed in which the Company granted Nycomed rights to develop
and market Imagify in Europe. As of September 30, 2007, Nycomed has paid $12.0 million in license fees for the Company's research and development efforts, which was being recognized
ratably in revenue over the development period initially estimated at 42 months in July 2004. Estimation of this development period involves the evaluation of many assumptions and
uncertainties inherent in the performance of a long term development project. The Company regularly evaluates these assumptions and uncertainties and the estimated development recognition period may
change if facts and circumstances change. During 2006, the estimated development period was revised from 42 months to 54 months. There was no change in the amortization period during the
three and nine months ended September 30, 2007. The remaining $3.3 million of the $12.0 million in development payments already received, but yet to be recognized as revenue, is
included in deferred revenue at September 30, 2007 and will be recognized over the remaining estimated development period.

In
October 2005 and February 2006, the Company and Nycomed amended the collaboration agreement to accelerate $2.0 million in milestone payments in order to fund
certain activities associated with brand development and qualification of a commercial manufacturing facility. The $2.0 million in payments received pursuant to these amendments are considered
advances against a future milestone payment for a European regulatory filing, or Marketing Authorization Application ("MAA"). This amount is classified as deferred revenue until the MAA milestone is
achieved, provided that the applicable revenue recognition criteria are met.

9.     Income Taxes

The Company has established a full valuation allowance equal to the amount of its deferred tax asset as the realization of such asset is uncertain. In addition,
the Company's effective income tax rate is zero for all periods presented due to the full valuation allowance and lack of other income tax obligations.

In
July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. (FIN) 48,Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109.FIN 48

14

---



clarifies
the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with SFAS 109,Accounting for Income
Taxesand prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under
FIN 48, the impact of an uncertain tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon
examination by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The
Company is subject to taxation in the U.S. and the Commonwealth of Massachusetts. In connection with the adoption of the provisions of FIN 48 on January 1, 2007 the Company
reviewed its tax positions. Based upon the reviews of the tax positions, the Company did not identify any uncertain tax positions upon the adoption of FIN 48 and therefore the Company's adoption of
FIN 48 had no cumulative effect on its consolidated financial statements. There have been no changes in unrecognized tax benefits as a result of tax positions taken during the current period. The
Company's tax years since its inception in 1991 are subject to examination by the tax authorities.

The
Company did not have any accrued interest or penalties in its statement of financial position at the adoption of FIN 48. Should the Company incur interest or penalties related to
income taxes those amounts would be included in income tax expense.

10.   Stockholders' Equity

Convertible Exchangeable Preferred Stock

On February 24, 2005, the Company issued 900,000 shares of 6.5% convertible exchangeable preferred stock (the "Preferred Stock") at $50.00 per share
resulting in aggregate gross proceeds to the Company of $45.0 million (net proceeds of approximately $41.9 million after deducting underwriting discounts, commissions and offering
expenses). Each share of Preferred Stock has a liquidation preference of
$50.00 per share. Dividends on the Preferred Stock are cumulative from the date of original issue at the annual rate of $3.25 per share, payable quarterly on the first day of March, June, September,
and December. Any dividends must be declared by the Company's board of directors and must come from funds that are legally available for dividend payments. As of September 30, 2007, dividends
accumulated on the Preferred Stock totaled $6.5 million, of which $6.3 million have been paid.

In
November 2007, the Company's board of directors declared a quarterly dividend on the preferred stock for all holders as of November 15, 2007. This dividend, which
totaled $0.6 million in the aggregate, will be paid on December 1, 2007.

The
Preferred Stock is convertible into the Company's common stock at any time at the option of the holder at a conversion rate of 7.2886 shares of common stock for each share of
Preferred Stock, based on an initial conversion price of $6.86 per share. The initial conversion price is subject to adjustment in certain events, but is not subject to "price based"
anti-dilution adjustment. The Company has reserved approximately 5.0 million shares of common stock for issuance upon such conversion.

The
Company may elect to automatically convert some or all of the Preferred Stock into shares of common stock if the closing price of the Company's common stock has exceeded $10.30 per
share (150% of the conversion price) for at least 20 trading days during any 30-day trading period, ending within five trading days prior to notice of automatic conversion. Prior to
March 1, 2009, if the Company elects to automatically convert, or if any holder elects to voluntarily convert, the Preferred Stock, the Company will also make an additional payment
("Make-Whole" payment) equal to the aggregate amount of dividends that would have been payable on the Preferred Stock so converted from the original date of issuance through and including
March 1, 2009, less any dividends already paid on the Preferred Stock. This additional payment is payable by the Company, at its option, in cash, in

15

---



additional
shares of its common stock, or in a combination of cash and shares of common stock. The Company has reserved a maximum of approximately 0.6 million shares of common stock for
issuance under this Make-Whole provision.

In
April 2007, one stockholder voluntarily converted 40,000 shares of preferred stock into 291,545 shares of the Company's common stock. In connection with the conversion, the
Company issued an additional 43,551 shares of the Company's common stock in satisfaction of the required Make-Whole payment. Through September 30, 2007, there were 690,000 shares of
Preferred Stock outstanding, and 210,000 shares of Preferred Stock had been voluntarily converted into 1,530,612 shares of the Company's common stock. In connection with such conversions, the Company
issued an additional 347,603 shares of the Company's common stock in satisfaction of the required Make-Whole payment. The fair value of these Make-Whole payments was
approximately $1.7 million, which was charged against the derivative liability.

In
accordance with SFAS No. 133, the Company is required to separate and account for as an embedded derivative, the dividend make-whole payment feature of the
Preferred Stock offering. As an embedded derivative instrument, the dividend make-whole payment feature must be measured at fair value and reflected as a liability. Changes in the fair
value of the outstanding portion of the derivative are recognized in earnings as unrealized gain or loss on derivative in the statement of operations. The Company determined the fair value of the
dividend make-whole payment feature to be $3.1 million at February 24, 2005 (the commitment date). This amount was allocated from the proceeds of the Preferred Stock to the
derivative liability. At September 30, 2007, the derivative liability was valued at approximately $1,000.

The
Company may elect to redeem the Preferred Stock at declining redemption prices on or after March 6, 2009.

The
Preferred Stock is exchangeable, in whole but not in part, at the option of the Company on any dividend payment date for the Company's 6.5% convertible subordinated debentures
("Debentures") at the rate of $50 principal amount of Debentures for each share of Preferred Stock. The Debentures, if issued, will mature 25 years after the Exchange Date and have terms
substantially similar to those of the Preferred Stock. The Preferred Stock has no maturity date and no voting rights prior to conversion into common stock, except under limited circumstances.

Common Stock

On June 15, 2007, the Company sold 7,694,220 units, each unit consisting of (i) one share of common stock and (ii) one warrant to purchase
0.4 shares of common stock at an exercise price of $3.10 per share, for a purchase price of $2.60 per unit, resulting in aggregate gross proceeds to the Company of approximately $20.0 million
(net proceeds of approximately $18.7 million after deducting underwriting discounts and commissions and estimated offering expenses). The shares of common stock and warrants were immediately
separable and were issued separately. The warrants had a fair value of approximately $3.2 million, will be exercisable beginning on December 15, 2007 and until June 15, 2012 and
have been included in Additional paid-in capital at September 30, 2007.

As
of September 30, 2007, there were 98.5 million shares of common stock authorized, 46.3 million shares of common stock outstanding and 25.7 million shares
of common stock reserved for issuances, representing 5.0 million shares reserved for issuance for in connection with outstanding convertible exchangeable preferred stock, 0.6 million
shares reserved for issuance in connection with the make-whole payments provisions of the outstanding convertible exchangeable preferred stock, 9.8 million shares reserved for
issuance in connection with outstanding common stock warrants, 4.6 million shares reserved for issuance in connection with outstanding stock options, 5.5 million shares reserved for
issuance, in aggregate, in connection with shares available for future stock or option grants under the 2003 Stock Option Plan and Amended 2005 Stock Option Plan and 0.2 million shares reserved
for issuance under the Employee Stock Purchase Plan.

16

---



Equity Line of Credit Arrangement

On August 31, 2006, the Company entered into what is sometimes termed an equity line of credit arrangement with Azimuth Opportunity Ltd. The
arrangement provides that, upon the terms and subject to the conditions set forth therein, Azimuth is committed to purchase up to $30,000,000 of the Company's common stock, or up to a maximum of
approximately 5.8 million shares of common stock, whichever occurs first, over the 18-month term of the agreement. No shares of common stock were issued nor was any commitment fee
paid to Azimuth in connection with the execution and delivery of the agreement. The Company is not required to sell any shares of common stock under the agreement.

From
time to time during the term of the agreement, and at the Company's sole discretion, the Company may present Azimuth with draw down notices requiring Azimuth to purchase the
Company's common stock at a per share purchase price equal to the daily volume weighted average price of the common stock, less a discount ranging from 3.875% to 5.875%. Through September 30,
2007 the Company has not issued any shares under this agreement.

11.   Common Stock Warrants

As of September 30, 2007, warrants to purchase shares of the Company's common stock, the origination of which were derived in connection with debt and
lease financing transactions, the collaborative agreement with Nycomed and the April 2006, December 2006 and June 2007 common stock offerings, were outstanding for an aggregate of
9,817,256 shares of common stock at an effective weighted average price of $4.84 per shares as follows:

Number of
Shares

Exercise Price
Per Share

Expiration
Date5,194


28.50

February 21, 20083,404


18.00

February 28, 2008450,897


8.46

April 11, 2008684


14.00

April 11, 20087,540


8.46

June 27, 2008573,105


8.50

August 2, 200816,212


19.80

October 16, 200814,934


19.80

October 19, 2008114,895


8.50

October 20, 200855,732


6.28

November 30, 20092,688


19.80

January 5, 201030,844


28.50

March 30, 201128,138


28.50

September 27, 20111,731,600


7.97

April 12, 20113,703,701


3.11

December 12, 20113,077,688


3.10

June 15, 20129,817,256

$
4.84


12.   New Accounting Pronouncements

In September 2006, the FASB issued SFAS (FAS) No. 157,Fair Value Measurements, which is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The purpose of FAS 157 is to clarify and set forth
consistent rules for defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles and expanding disclosures about fair value measurements.
FAS 157 applies under other accounting pronouncements that require or permit fair value measurements where those accounting pronouncements have determined that fair value is the relevant
measurement attribute. FAS 157 does

17

---



not
require any new fair value measurements, but for some entities the application of FAS 157 could change current practice. The Company is currently assessing what impact, if any, the adoption
of this statement will have on its consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities,which
is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. This statement allows the measurement at fair value of financial instruments and certain
other items that are currently not required to be measured at fair value. The objective of FAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this
Statement permits the measurement of eligible items at fair value at specified election dates, with unrealized gains and losses on the items for which the fair value option has been elected reported
in earnings at each subsequent reporting date. The Company is currently assessing what impact, if any, the adoption of this statement will have on its consolidated financial statements.

In
June 2007, the Emerging Issues Task Force issued EITF 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services Received for
Use in Future Research and Development Activities, which is effective as of the beginning of an entity's first fiscal year beginning
after December 15, 2007. This abstract discusses the treatment of the nonrefundable portion of advance payments made pursuant to an executory contractual arrangement for future research and
development activities. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such
amounts should be recognized as an expense as the related goods are delivered or the related services are performed. If an entity does not expect the goods to be delivered or services to be rendered,
the capitalized advance payment should be charged to expense. We are currently assessing what impact, if any, the adoption of this statement will have on our consolidated financial statements.

18

---





ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements contained herein, including without limitation, "Management's Discussion and Analysis of Financial Condition and Results of
Operation," contains certain projections, estimates and other forward-looking statements. "Forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995,
are not historical facts and involve a number of risks and uncertainties. Words herein such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates,"
"projects," "predicts," "intends," "potential," and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify
forward-looking statements.

Forward-looking statements include, but are not limited to: our plans to develop and market new products and the timing of these development programs, in
particular our estimates of the timing of an New Drug Application ("NDA") and Marketing Authorization Application ("MAA") for Imagify; the timing and likelihood of regulatory approval of an NDA and
MAA for Imagify; the level of clinical and commercial interest in Imagify; the required size and make-up of a sales force to effectively launch Imagify; our development of other product
candidates; our ability to qualify a commercial manufacturing facility for Imagify; our intentions to enter into strategic partnership agreements with respect to Imagify or our other product
candidates; our capital requirements and our needs for additional financing; the timing and level of future expenses, revenues and profitability; our estimates of the size of the potential markets for
our product candidates; our selection and licensing of product candidates; our ability to attract and retain collaborators with acceptable development, regulatory and commercialization expertise; the
benefits to be derived from corporate collaborations, license agreements and other collaborative efforts, including those relating to the development and commercialization of our product candidates;
sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other collaborative efforts for the development and commercialization of
products; our ability to create an effective direct sales and marketing infrastructure for products we elect to market and sell directly; the rate and degree of market acceptance of our product
candidates; the timing and amount of reimbursement for our product candidates; the success and timing of other competing therapies that are or may become available; and the manufacturing capacity for
our product candidates.

Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking
statements. Any forward-looking statement should be considered in light of factors discussed in Part II. Item 1A "Risk Factors" and elsewhere in this report. We caution readers not to place
undue reliance on any such forward-looking statement, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the Securities
and Exchange Commission, to publicly update or revise any such statements to reflect any
change in company expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set
forth in the forward-looking statements.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this
Form 10-Q.

Overview

We are a specialty pharmaceutical company that develops new drugs and improved formulations of existing drugs using our proprietary porous microparticle
technology. We are focused on developing proprietary drugs that can offer significant benefits such as improved safety and efficacy, increased patient compliance, greater ease of use, expanded
indications or reduced cost. Our lead product candidate, Imagify (perflubutane polymer microspheres), is a cardiovascular drug for the detection of coronary artery disease, the leading
cause of death in the United States which, we believe, has

19

---



completed
the Phase 3 clinical trials necessary for the filing of a NDA. We believe that our Imagify clinical results support an NDA submission and we are working to submit an NDA for Imagify in early
2008. In Europe, we have partnered with Nycomed for the marketing and sale of Imagify. In addition to our progress with Imagify, we have demonstrated that our technology can improve the formulation of
hydrophobic drugs and inhaled asthma drugs.

We
believe that Imagify-enhanced cardiac stress ultrasound has the potential to significantly reduce the time, cost and resources needed in the assessment of myocardial perfusion,
compared to nuclear stress testing, without subjecting patients to radiation. Myocardial perfusion is blood flow to the heart muscle, a sensitive marker for coronary artery disease. There is no
ultrasound imaging agent currently approved by FDA for use in cardiac ultrasound for myocardial perfusion imaging or for any other indication in conjunction with cardiac stress ultrasound.

We
developed Imagify and our other product candidates using our proprietary technology which enables us to control the size and porosity of particles, including nanoparticles and
microparticles, in a versatile manner, so we can customize the particles to address the delivery needs of a variety of drugs. We are focused on creating porous microparticles that are smaller than red
blood cells. Some of these microparticles are nanoparticles which are smaller than 1 micron. Small microparticles are important for delivering drugs intravenously so that they can pass through the
body's smallest blood vessels, for increasing the surface area of a drug so that the drug will dissolve more rapidly, and for delivering drugs to the lung via inhalation. Porosity is important for
entrapping gases in microparticles, for
controlling the release rate of the drug from a microparticle, and for targeting inhaled drugs to specific regions of the lung.

We
have incurred significant operating losses to develop our product candidates and we anticipate continuing to incur significant operating losses in the coming years. In particular, we
expect to incur significant additional expenses and experience other significant capital requirements to seek regulatory approval for Imagify, to complete the qualification of a manufacturing facility
for the initial commercial manufacture of Imagify and, subject to regulatory approvals, to launch Imagify. Since our inception, we have funded our operations primarily through private and public
placements of equity securities, equipment-backed financings and other debt financings.

Imagify Phase 3 Clinical Trials

We have completed two Phase 3 pivotal clinical trials for Imagify and we believe that these clinical trial results support our plan to submit an NDA seeking
approval to market and sell Imagify. These two pivotal trials, named RAMP-1 and RAMP-2, respectively, were independent multi-center pivotal trials conducted at clinical sites
primarily located in North America and Europe. "RAMP" stands for Real-time Assessment of Myocardial Perfusion with echocardiography. Data from the Phase 3 pivotal studies are intended for
submission to U.S., European, and potentially other regulatory authorities.

Pivotal Trial Design.RAMP-1 and RAMP-2 were designed to demonstrate that Imagify-enhanced cardiac
stress ultrasound is non-inferior to nuclear stress testing. Non-inferior refers to a statistical type of trial analysis which is designed to show that one test is comparable
to another test within a certain statistical margin of error. We believe that if the trial data demonstrates to regulatory authorities that Imagify-enhanced cardiac stress ultrasound is
non-inferior to nuclear stress testing and if Imagify receives regulatory approval, that Imagify-enhanced cardiac stress ultrasound will compete with nuclear stress tests based on criteria
such as lower costs, faster study time, quicker availability of results and no exposure to radiation.

Patients
enrolled in the RAMP-1 and RAMP-2 trials acted as their own controls. Patients enrolled in these studies received an Imagify-enhanced cardiac stress
ultrasound. All of the patients evaluated for efficacy in these trials also received a nuclear stress test. The Imagify-enhanced cardiac stress ultrasound images and the nuclear stress images
resulting from these studies were forwarded by the

20

---



clinical
sites to an independent clinical research organization where all information about the patients, other than what is shown by the images themselves, was removed. Because all such patient
information was removed from the images, evaluators of the images are referred to as "blinded readers". In the trials, images produced by Imagify-enhanced stress echo were evaluated by
echocardiologists, who we refer to as ultrasound blinded readers. Images produced by nuclear stress tests were evaluated by nuclear cardiologists, who we refer to as nuclear blinded readers. In these
trials, we used expert and highly experienced nuclear readers. In addition, to ensure high quality standards for the comparator and truth standards in the trials, we standardized the protocol for the
conduct of the nuclear stress tests and coronary angiography based on our understanding of best clinical practice and used a leading nuclear imaging agent for enhancement of the nuclear stress images.

In
the trials, a truth standard defined which patients have disease and which patients are normal, and served as the basis for quantifying the performance of the ultrasound blinded
readers and the performance of the nuclear blinded readers. Non-inferiority or, superiority when achieved, was determined by comparing the performance of the ultrasound blinded reader to
the nuclear blinded reader.

Non-inferiority
of Imagify-enhanced cardiac stress ultrasound relative to nuclear stress was evaluated in three ways. First, non-inferiority was evaluated in all
patients. "Accuracy" is defined as a measure of the percentage of patients in which the test is correct relative to the truth standard. Accuracy was established in our RAMP-2 statistical
analysis plan as the principal primary endpoint of the pivotal trials and the gating endpoint with respect to our NDA submission. In accordance with the trial design, if the accuracy endpoint was not
achieved in the trial, the trial would fail. Provided that ultrasound blinded readers demonstrated that their accuracy was non-inferior to the results from the nuclear blinded readers,
non-inferiority was evaluated in two subsets of patients, those with disease and those without disease. "Sensitivity" is defined as a measure of the effectiveness of the test in assessing
the presence of disease in the patients who have been shown by the truth standard as having coronary artery disease and "specificity" as a measure of the effectiveness of the test in assessing the
absence of disease in the patients who have been shown by the truth standard to be free of coronary artery disease. Sensitivity and specificity were the second and third clinical trial endpoints; the
component primary endpoints. For both ultrasound and nuclear, because sensitivity and specificity are subsets of accuracy, when sensitivity increases and overall accuracy remains unchanged there is a
corresponding decrease in specificity. Imaging techniques such as nuclear and ultrasound, which provide clinicians with information for their evaluation, involve reader judgment and have historically
demonstrated variability between readers with respect to sensitivity and specificity depending upon whether the readers are aggressive (meaning a tendency to diagnose disease) or conservative (meaning
a tendency to diagnose an absence of disease) in evaluating difficult cases. The principal primary endpoint of accuracy is a measure that incorporates both sensitivity and specificity across all
patients in the clinical trials.
Accuracy tends to be more objective as it is less susceptible to conservative and aggressive reader judgment.

Patients
enrolled in the RAMP-1 and RAMP-2 clinical trials all were patients suspected of having, or known to have, coronary artery disease. For inclusion in the
RAMP-1 trial, all patients were previously referred, in accordance with the current practice of medicine, for a nuclear stress test. For inclusion in the RAMP-2 trial, all
patients were previously referred, in accordance with the current practice of medicine, for a coronary angiography. Accordingly and intentionally, overall patients enrolled in RAMP-2 had a
higher risk of coronary artery disease than patients enrolled in RAMP-1.

Pivotal Trial Results Overview.There were three different readers in each of RAMP-1 and RAMP-2 (6
readers in total). All three readers demonstrated non-inferiority to nuclear stress with respect to the principal primary endpoint of accuracy. In the RAMP-1 trial, the trial
with the relatively lower risk patient population, the ultrasound blinded readers demonstrated superior specificity (the measure of effectiveness in assessing the absence of disease) compared to
nuclear stress. In the

21

---



RAMP-2
trial, the trial with the relatively higher risk patient population, the ultrasound blinded readers demonstrated superior sensitivity (the measure of effectiveness in assessing
disease) compared to nuclear stress. We demonstrated superior specificity in RAMP-1 and superior sensitivity in RAMP-2. Only one of the three ultrasound blinded readers
demonstrated non-inferiority to nuclear stress for sensitivity in RAMP-1, and only one of the three ultrasound blinded readers demonstrated non-inferiority to
nuclear stress for specificity in RAMP-2. We believe that the missed component primary endpoints in these trials was due largely to the inherent trade-off between sensitivity
and specificity caused by "aggressive" and "conservative" ultrasound and nuclear readers. While these component primary endpoints were missed, we believe that both trials demonstrated that, overall,
Imagify-enhanced cardiac stress ultrasound is just as accurate as nuclear stress across all readers. We also believe that because, in addition to achieving the principal primary endpoint in both
trials, Imagify-enhanced cardiac stress ultrasound also demonstrated superior results on component primary endpoints which we believe were the most important in each of these trials (specificity in
the lower risk patient population and sensitivity in the higher risk patient population), this data supports an NDA submission for Imagify. We intend to submit our NDA in the fourth quarter of 2007
subject to completion of required remaining qualification steps relating to its commercial manufacturing facility.

RAMP-1 Trial Results.In June 2006, we announced results of RAMP-1. 320 patients were enrolled
in the RAMP-1 clinical trial. More than 99% of the ultrasound images acquired from patients enrolled in the trial were evaluable. The truth standard in this trial was angiography, clinical
outcome or clinical outcome with the unblinded evaluation of the nuclear stress test. The truth standard was angiography in 42% of patients.

The
accuracy and specificity results for RAMP-1 exceeded the criteria for success, which was defined in our statistical analysis plan as the ability of 2 out of 3 ultrasound
blinded readers to show non-inferiority compared to nuclear stress. Three of three ultrasound blinded readers had statistically non-inferior accuracy to the nuclear blinded
reader, whose accuracy was 70% (all p values <0.005). Two of three ultrasound blinded readers had statistically superior specificity to the nuclear blinded reader, whose specificity was 63%
(p value for both with respect to non-inferiority <0.001). The sensitivity results missed the criteria for success of the trial with one of three ultrasound blinded readers
having statistical non-inferior sensitivity (p=0.002) to the nuclear blinded reader's sensitivity of 78%. Based upon our review of the safety data from this trial, we believe Imagify was
well tolerated. Disease prevalence in the RAMP-1 trial was 44%.

The
majority of adverse events, or AEs, reported were mild in intensity, transient, and resolved without residual effects. The most common AEs reported were headache, chest pain, nausea,
flushing and dizziness and the majority of these AEs occurred following the administration of the dipyridamole pharmacologic stress agent prior to stress imaging. Serious adverse events, or SAEs, and
dose discontinuation was experienced in four and five of 320 patients, respectively. All SAEs were non-life threatening, transient, and resolved without residual effects.

RAMP-2 Trial Results.In May 2007, we announced results of RAMP-2. 457 patients were enrolled
in the RAMP-2 trial. In accordance with the trial design, patients who did not have a nuclear stress test or whose nuclear stress test was not in accordance with the trial protocol were
evaluated for safety but excluded from the primary efficacy analysis. The reported efficacy results from the RAMP-2 trial are based on 377 patients. 100% of the ultrasound images were
evaluable. Coronary angiography was used in 98% of the patients studied as the truth standard. A truth standard defines which patients have disease and which patients are normal, and serves as the
basis for quantifying the performance of the ultrasound blinded readers and the performance of the nuclear blinded readers.

The
accuracy and sensitivity results for RAMP-2 exceeded the criteria for success, which was defined in our statistical analysis plan as the ability of 2 out of 3 ultrasound
blinded readers to show non-inferiority compared to nuclear stress. Three of the ultrasound blinded readers had superior

22

---



sensitivity
and non-inferior accuracy to nuclear stress. The median Imagify-enhanced cardiac ultrasound blinded results and median nuclear stress reader were, respectively, 70% and 67% for
accuracy (all p values <0.001) and 73% and 61% for sensitivity (all p values <0.020). The specificity results missed the criteria for success with one of three ultrasound blinded
readers having statistical non-inferior specificity to nuclear stress (p = 0.01). The median Imagify-enhanced cardiac ultrasound blinded results and median nuclear stress results
for specificity were, respectively, 66% and 76%. Based upon our review of the safety data from this trial, we believe Imagify was well tolerated. Disease prevalence in the RAMP-2 trial was
58%.

The
majority of AE'S reported were mild in intensity, transient, and resolved without residual effects. The most common AEs reported were headache, increased white blood cell count,
flushing, nausea, and chest pain. Each patient in the trial was subjected to pharmacological stress to assess myocardial perfusion. The majority of these adverse events occurred following the
administration of the dipyridamole pharmacologic stress agent. SAEs were reported in six patients. All SAEs were non-life threatening. Seven of the 457 patients enrolled discontinued
dosing in the clinical trial due to AEs or SAEs. Imagify has now been cumulatively studied in over 1,000 patients with known or suspected of having coronary artery disease. Based upon the results of
these studies, the Company believes that Imagify is well tolerated.

We
believe that experience from RAMP-1 contributed to the higher ultrasound sensitivity results in RAMP-2. Following RAMP-1, the ultrasound blinded
readers from RAMP-2 were trained based on these findings. During this training period, the RAMP-2 readers remained blinded to the RAMP-2 results.

The
discussion of our NDA submission timing and likelihood of success reflects our current assumptions, based on our knowledge and experience and the guidance of our advisors. We cannot
assure you that these timelines will be met, nor can we assure you that our estimates and assumptions will not change based upon ongoing regulatory feedback or that FDA will accept and approve our NDA
once submitted. We cannot control nor predict the timing or extent, if any, of FDA approval of Imagify. Nycomed is responsible for submission of Imagify for approval in Europe. We cannot control nor
predict the timing or extent, if any, of Imagify approval in Europe or elsewhere.

Imagify Manufacturing Facility Update

Prior to filing an NDA for Imagify, we must demonstrate that we can successfully and repeatedly manufacture Imagify in compliance with current good manufacturing
practices, or cGMPs, enforced by FDA and overseas regulatory agencies in the manufacturing facility that we intend to use to produce Imagify at commercial launch. We must successfully demonstrate the
manufacture of Imagify in accordance with European regulatory requirements prior to Nycomed filing an MAA for Imagify.

In
late 2005 we substantially completed the build-out of a 58,000 square foot commercial manufacturing facility in Tewksbury Massachusetts. In 2006 we completed commissioning
of the manufacturing equipment and utilities, produced full commercial scale development batches of Imagify and substantially completed all Installation Qualification, or IQ, and Operational
Qualification, or OQ, requirements relating to the equipment and utilities initially needed for this facility. We continue to make progress on our remaining steps in 2007 to the qualification of the
manufacturing facility, which include; aseptic validation, process qualification and continued product stability testing. All such qualification activities need to be completed under cGMPs. Data from
the production of Imagify under cGMPs is intended to be part of our NDA submission of Imagify. Based upon our current plans, we expect to complete this qualification phase in time to support a NDA
submission in early 2008. We believe that our existing facilities, assuming the addition of a second lyophilizer that the facility is designed to support, are adequate to meet our current and initial
expected commercial requirements and that suitable space will be available as needed.

23

---



Although
the qualification of the commercial manufacturing facility has completed IQ's and OQ's, we cannot assure you that we will not encounter complications in the qualification of
operations in this facility which complications could add additional costs or delay our filing of a NDA for Imagify.

Operational Activities Update

Our current operational activities include:

NDA/MAA:Steps we plan to take for submission of the NDA include further analyzing and summarizing the clinical trial
results, qualifying our commercial manufacturing facility and meeting with FDA to confirm our belief that no additional clinical trials are necessary. We completed a pre-NDA filing meeting
with FDA on the Chemistry, Manufacturing and Controls ("CMC") section of our Imagify NDA and plan to incorporate FDA feedback into our submission in early 2008. We have an additional
pre-NDA filing meeting scheduled with FDA in the fourth quarter of 2007, at which time we plan to further clarify the data to be included in the submission. We intend to submit the NDA in
electronic eCTD format so that it can also be utilized for submission in Europe.

Preparations for Commercialization of Imagify:We plan to continue conducting market research and advancing our plans and
preparation for the commercial launch of Imagify. We also plan to conduct various clinical trials designed to support the commercialization of Imagify.

We
plan to evaluate the prognostic value of Imagify, which is the ability to predict, using Imagify, if the patient is likely to have a future cardiac event, through a trial called PACE
(PrognosticAssessment ofContrast Echocardiography). We have
begun enrolling patients in the PACE clinical trial, we expect to enroll a majority of the patients from the
RAMP-1 and RAMP-2 clinical trials in this trial by early 2008. No new administration of Imagify will be required for PACE, as we will conduct follow-up analysis on
patients from the RAMP-1 and RAMP-2 trials.

Publication of Imagify Results:In November 2007 we presented data from the RAMP-1 and RAMP-2
clinical trials at the annual American Heart Association meeting in Orlando, Florida. We will continue to work with the clinical investigators to publish further data on our clinical trial results.

Strategic Partnership:We are pursuing a strategic partnership agreement for Imagify in order to provide a strengthened
financial basis for moving the Imagify program forward as well as to provide additional resources for advancing our other product candidates.

Other Product Development:We continue to increase our emphasis on pipeline development. In November 2007 we announced
our product development candidate, AI-850, and Abraxane, a registered trademark of Abraxis Bioscience, Inc., have comparable pharmacokinetic profiles based upon human
data available in publications on each drug. AI-850 is our patented formulation of paclitaxel, the active ingredient in Abraxane. Drug product candidates that are confirmed to
have equivalent pharmacokinetics in a human study may be eligible for regulatory approval as a bioequivalent and the development timeline is very fast, since Phase 2 and 3 human clinical trials are
not required. Acusphere plans to make changes to the AI-850 formulation that will make it a more suitable commercial formulation and plans to work with a partner to bring this improved
formulation into development for approval as a bioequivalent to Abraxane. We have commenced discussions with potential partners to move this program forward.

Although
we are working towards the achievement of these operational objectives, there can be no assurance that we will successfully achieve these objectives in a timely or successful
manner, or that they will be achieved at all.

24

---



Financial Operations Overview

Revenue.We have not generated any revenue from product sales since our inception. Since July 2004, when we entered
into our collaboration agreement with Nycomed, the majority of our revenue has been collaboration revenue recognized in connection with research and development activities performed under this
agreement. Through September 30, 2007, Nycomed has paid us $12.0 million in license fees for our research and development efforts. We are recognizing this $12.0 million of initial
license and research and development payments ratably over a period currently estimated at 54 months. The length of this research and development period, which is the period over which we are
obligated to perform services, is estimated based on available facts and circumstances. We periodically evaluate the assumptions underlying our estimate and change our estimate when appropriate.

Further
in the future, we will seek to generate revenue from a combination of product sales, up-front or milestone payments and manufacturing payments in connection with
collaborative or strategic relationships, and royalties resulting from the license of our products and intellectual property.

Research and Development Expense.Research and development expense consists of expenses incurred in developing, manufacturing
and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers in conjunction with independently
monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical trials, costs of materials used in clinical trials and research and development, depreciation of
capital resources used to develop our products, costs of facilities, the legal costs of pursuing patent protection on select elements of our intellectual property, costs for intellectual property
rights we have acquired or licensed and stock-based compensation. We expense research and development costs, including patent related costs, as incurred. We believe that significant investment in
product development is a competitive necessity and plan to continue these investments in order to realize the potential of our product candidates and proprietary technologies. Development programs for
later stage product candidates, such as Imagify, tend to cost more than earlier stage programs from our Hydrophobic Drug Delivery System ("HDDS") and Pulmonary Drug Delivery System ("PDDS") due to the
length and the number of patients enrolled in clinical trials for later stage programs and due to costs of scaling production to commercial scale.

General and Administrative Expense.General and administrative expense consists primarily of salaries and other related costs
for personnel in executive, finance, accounting, information technology, business development and human resource functions. Other costs include facility costs not otherwise included in research and
development expense, professional fees for legal and accounting services and stock-based compensation. In addition, we categorize our market research and other marketing-type costs as
general and administrative expense because we have not yet obtained approval to market or sell our product candidates.

Interest Income.Interest income consists of interest earned on our cash and cash equivalents.

Interest Expense.Interest expense consists primarily of interest incurred on equipment leases, equipment loans and other
financing arrangements.

Change in Valuation of Derivative.The terms of our February 2005 convertible preferred stock offering and our
March 2005 Mass Development loan agreement contain features considered to be embedded derivatives which are recorded at estimated fair value in accordance with Statement of Financial Accounting
Standards No. 133,Accounting for Derivative Instruments(SFAS 133). Change in valuation of derivative consists of other income (expense)
recognized on the change in fair value of the derivative at the end of each reporting period. The change in the value of the embedded derivative related to the preferred stock is affected by a number
of assumptions including the number of preferred shares outstanding, the amount of dividends paid and the probability and timing of

25

---



conversion
into common stock. The derivative liability is reduced for any make-whole payments made during the period upon conversions of preferred stock to common stock. The change in the
value of the derivative related to the loan is affected by the expected timing of future positive net cash flows from operations.

Dividends on Preferred Stock.For the nine months ended September 30, 2007 and 2006, dividends on preferred stock
consisted of dividends paid or accumulated on the convertible exchangeable preferred stock which we issued in February 2005. Dividends on preferred stock exclude any make-whole
payments on conversion of preferred stock to common stock. Dividends on our preferred stock are cumulative from the date of original issue at the annual rate of $3.25 per share, payable quarterly on
the first day of March, June, September, and December. Any dividend payment must be declared by our board of directors and must come from funds that are legally available for dividend payments.

Results of Operations

Three Months Ended September 30, 2007 versus 2006

Revenue.In connection with our collaboration agreement with Nycomed entered into in July 2004, Nycomed has paid us
$12.0 million in license fees for our research and development efforts. We had previously been recognizing this $12.0 million in research and development payments ratably over the
estimated development period of 42 months. Estimation of this development period involves the evaluation of many assumptions and uncertainties inherent in the performance of a long term
development project. We regularly evaluate these assumptions and uncertainties and our estimated development recognition period may change if facts and circumstances change. We reevaluated the
assumptions underlying the development term and during 2006 modified our estimate of the development period over which we are obligated to perform services to 54 months. In accordance with this
54-month amortization period, collaboration revenue recognized for the three months ended September 30, 2007 was $0.7 million versus $0 in the prior year period. No revenue
was recognized for the three months ended September 30, 2006 due to a change in the estimated development period in 2006.

Research and Development Expense.Research and development expense for the three months ended September 30, 2007 was
$11.7 million, versus $10.0 million in the prior year period, an increase of $1.7 million, or 17%. The increase was primarily due to higher staffing levels and an increase in
contract service costs primarily associated with qualification activities in our manufacturing facility.

26

---



The
following table summarizes the primary components of our research and development expense for the three months ended September 30, 2007 and 2006 (in thousands):

Three months ended September 30,2007

2006Direct costs:Imagify

$
5,509

$
5,432HDDS and PDDS


1,683


238Other direct costs


991


782Total direct costs

$
8,183

$
6,452Indirect costs:Facility rent costs


862


842Depreciation


2,474


2,504All other indirect costs


209


195Total indirect costs


3,545


3,541Total research and development expense

$
11,728

$
9,993


We
expect to incur higher expense for the commercial manufacturing facility for the remainder of 2007 versus the prior year due to costs for the ongoing validation of the facility and
its equipment, the purchase of raw materials and laboratory supplies and the hiring of additional personnel. Research and development costs generally increase as programs progress from early stage
clinical trials to late stage clinical trials. Our primary research and development programs are as follows:

Late Stage Clinical Development Program (Imagify).Our lead product candidate, Imagify, is a cardiovascular drug designed for
the detection of coronary artery disease, and the majority of our direct research and development expenditures relate to our Imagify program. Direct expense for research and development for Imagify
for the three months ended September 30, 2007 was $5.5 million, versus $5.4 million in the prior year period. Included in Imagify direct costs for the three months ended
September 30, 2007 and 2006 were $3.4 million and $3.0 million, respectively, for costs relating to manufacturing-related activities and manufacturing facility qualification.

Early Stage Development Programs (HDDS and PDDS).During 2007, we anticipate the costs of early stage development programs to
increase as we increase our focus on development of new product candidates. However, because these programs are in relatively early stages of development, we
anticipate that costs related to Imagify will continue to represent our primary research and development expenditures through 2007.

Other Costs.Other direct research and development costs primarily consist of management and preclinical evaluation of other
product candidates.

Each
of our research and development programs is subject to risks and uncertainties, including the requirement to seek regulatory approvals, which are outside of our control. For
example, our clinical trials may be subject to delays or rejections based on our inability to enroll patients at the rate that we expect or our inability to produce clinical trial material in
sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials. Moreover, the product candidates identified in these research and development programs,
particularly our early stage programs, must overcome significant technological, manufacturing and marketing challenges before they can be successfully commercialized. As a result of these risks and
uncertainties, we are unable to predict with any certainty the period in which material net cash inflows from such projects could be expected to commence or the

27

---



completion
date of these programs. Failure to commercialize these product candidates on a timely basis could have a material adverse affect on our business, financial condition and results of
operations. We may seek to establish collaborative relationships to help us commercialize these product candidates, but there can be no assurance that we will be successful in doing so.

General and Administrative Expense.General and administrative expense for the three months ended September 30, 2007
was $3.1 million, versus $2.9 million in the prior year period, an increase of $0.2 million, or 7%. The increase was primarily due to higher salary costs due to increased
headcount.

The
following table summarizes the primary components of our general and administrative expense for the three months ended September 30, 2007 and 2006 (in thousands):

Three months ended September 30,2007

2006Direct costs

$
2,910

$
2,767Indirect costs:Facility costs


130


125Depreciation


52


51Total indirect costs


182


176Total general and administrative expense

$
3,092

$
2,943


We
anticipate general and administrative expenses to increase, including increases in expenses for marketing, sales and business development activities as we prepare for the
commercialization of Imagify as well as continue to evaluate opportunities for the application of our HDDS and PDDS technology and to support other product development efforts.

Interest Income.Interest income for the three months ended September 30, 2007 was $0.6 million, versus
$0.7 million in the prior year period, a decrease of $0.1 million, or 14%, primarily due to lower average cash balances during the period.

Interest Expense.Interest expense for the three months ended September 30, 2007 was $0.5 million, versus
$0.6 million in the prior year period, a decrease of $0.1 million, or 17%, partially due to lower average equipment loan balances during the period as a result of repayments under the
capital equipment lines.

Change in Valuation of Derivative.The derivative is related to the embedded derivative instrument from the dividend
make-whole payment feature of the preferred stock offering that closed in February 2005. Income from the change in valuation of derivative for the three months ended
September 30, 2007 was approximately $13,000, versus a income of approximately $0.1 million in the
prior year period. The derivative liability value is reduced as dividends payments on the preferred stock are made, as well as for any conversions of preferred stock into common stock.

Nine Months Ended September 30, 2007 and 2006

Revenue.As of September 30, 2007, in connection with our collaboration agreement with Nycomed, Nycomed paid us
$12.0 million in license fees for our research and development efforts. We had previously been recognizing this $12.0 million in research and development payments ratably over the
estimated development period of 42 months. Estimation of this development period involves the evaluation of many assumptions and uncertainties inherent in the performance of a long term
development project. We regularly evaluate these assumptions and uncertainties and our estimated development recognition period may change if facts and circumstances change. We reevaluated the

28

---



assumptions
underlying the development term and during 2006 modified our estimate of the development period over which we are obligated to perform services to 54 months. In accordance with this
54-month amortization period, collaboration revenue recognized for the nine months ended September 30, 2007 was $2.0 million versus $0.9 in the prior year period. Revenue was
lower in 2006 versus 2007 due to the change in the estimated development period during 2006.

During
the nine month period ended September 30, 2006 we recognized revenue of $0.2 million related to a feasibility study with a large pharmaceutical company utilizing our
HDDS technology. Also during the nine month period ended September 30, 2006 we performed clinical research services on behalf of Nycomed, relating to Imagify. We were paid for these services on
a time and materials basis and recognized approximately $0.1 million in revenue during the period.

Research and Development Expense.Research and development expense for the nine months ended September 30, 2007
decreased $9.9 million, or 23%, to $32.6 million versus $42.5 million in the prior year period. The decrease was due primarily to lower intellectual property acquisition costs of
$10.1 million, lower material costs due to the timing of a large material purchase from one vendor in January 2006 and lower expenses associated with our clinical trials partially offset
by higher personnel costs due to increased headcount.

The
following table summarizes the primary components of our research and development expense for the nine months ended September 30, 2007 and 2006 (in thousands):

Nine months ended September 30,2007

2006Direct costs:Imagify

$
15,175

$
18,078HDDS and PDDS


3,558


802Other direct costs


3,041


2,742Total direct costs

$
21,774

$
21,622Indirect costs:Facility rent costs


2,613


2,572Depreciation


7,420


7,541All other indirect costs


764


635Total indirect costs


10,797


10,748Write-off of intellectual property acquisition cost





10,137Total research and development expense

$
32,571

$
42,507


Research
and development expense includes $10.1 million for the nine months ended September 30, 2006 for the patents acquired or licensed under the GE and Bracco
intellectual property agreements.

We
expect to incur higher expense for the commercial manufacturing facility for the remainder of 2007 versus the prior year due to costs for the ongoing validation of the facility and
its equipment, the purchase of raw materials and laboratory supplies and the hiring of additional personnel. Research and development costs generally increase as programs progress from early stage
clinical trials to late stage clinical trials; however, we expect overall research and development expenses in 2007 to be lower than 2006, primarily because we do not anticipate entering into any new
agreements to license or acquire additional intellectual property rights relating to Imagify.

29

---



Our
primary research and development programs are as follows:

Late Stage Clinical Development Program.Our lead product candidate, Imagify, is a cardiovascular drug designed for the
detection of coronary artery disease, and the majority of our direct research and development expenditures relate to our Imagify program. Direct expense for research and development for Imagify for
the nine months ended September 30, 2007 was $15.2 million versus $18.1 million in the prior year period. This $2.9 million decrease was primarily due to lower clinical
costs due to the completion of enrollment in RAMP-2 clinical trial in June 2006 and lower material and consulting costs in 2007 versus 2006. Included in Imagify direct costs for the
nine months ended September 30, 2007 and 2006 were $7.9 million and $9.6 million, respectively, of costs relating to manufacturing related activities and manufacturing facility
qualification.

Early Stage Development Programs.During 2007, we anticipate the costs of early stage development programs to increase as we
increase our focus on development of new product candidates. However, because these programs are in relatively early stages of development, we anticipate that costs related to Imagify will continue to
represent our primary research and development expenditures through 2007.

General and Administrative Expense.General and administrative expense for the nine months ended September 30, 2007
was $9.7 million, versus $8.5 million in the prior year period, an increase of $1.2 million, or 14%. The increase was primarily due to higher contract services of approximately
$0.9 million for costs primarily related to marketing and business development activities and approximately $0.6 million for higher salary costs due to increased headcount, partially
offset by lower consulting costs.

The
following table summarizes the primary components of our general and administrative expense for the nine months ended September 30, 2007 and 2006 (in thousands):

Nine months ended September 30,2007

2006Direct costs

$
9,116

$
7,995Indirect costs:Facility costs


390


393Depreciation


163


149Total indirect costs


553


542Total general and administrative expense

$
9,669

$
8,537


We
anticipate general and administrative expenses to increase, including increases in expenses for marketing, sales and business development activities as we prepare for the
commercialization of Imagify as well as continue to evaluate opportunities for the application of our HDDS and PDDS technology and to support other product development efforts.

Interest Income.Interest income for the nine months ended September 30, 2007 and 2006 was $1.9 million and
$1.9 million, respectively.

Interest Expense.Interest expense for the nine months ended September 30, 2007 was $1.6 million, versus
$1.7 million in the prior year period, a decrease of $0.1 million, or 6%, partially due to lower average equipment loan balances during the period as a result of repayments under the
capital equipment lines.

30

---





Loss on Extinguishment of Debt.The loss on extinguishment of debt for the nine months ended September 30, 2007 of
$1.1 million represents the difference in the present value of the amended payment terms under the intellectual property agreements with Schering and GE.

Change in Valuation of Derivative.The change in the valuation of derivative resulted in a loss of $0.1 million during
the nine months ended September 30, 2007 versus income of $0.6 million in the prior year period. As of September 30, 2007 and December 31, 2006, the derivative liability
was valued at approximately $1,000 and $59,000, respectively.

Liquidity and Capital Resources

Historically, we have financed our business through the issuance of equity securities, debt financings, equipment leases and with funds from our collaboration
with Nycomed. Our liquidity requirements have arisen primarily from research and development expenditures, equipment expenditures and payments on outstanding indebtedness. As of September 30,
2007, we had cash and cash equivalents of $39.5 million. As of September 30, 2007 we owed approximately $0.1 million under capital leases and $18.0 million from notes
payable and other long-term obligations. We also had operating lease commitments totaling $14.1 million for rent of our facilities.

We
believe, based on our operating plans, that unless we elect to reduce our current rate of spending and forego pursuit of milestones on our current schedule, we will, before the end
the second quarter of 2008, require significant additional funds in order to fund our operations. We may raise these funds through public or private sales of equity, or from borrowings, or from
strategic partners. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development activities and the size and timing of creating
expanded manufacturing capabilities. We may also need additional funds for possible future strategic acquisitions of businesses, patent licenses, products or technologies complementary to our
business. We do not expect to generate significant revenues from Imagify, other than possible license or milestone payments, unless or until we or current or potential partners submit application for
and receive marketing approval from the applicable regulatory authorities. Allowing our resources to become depleted may make future funding more difficult or expensive. When additional funds are
required or, in advance of such requirements, we anticipate that funds will be needed, we may raise such funds from time to time through public or private sales of equity or from borrowings or from
strategic partners or we may delay funding of certain development activities which could delay the filing of our Imagify NDA and the commercialization of Imagify which would have a materially adverse
impact on our growth plans. We are evaluating our funding alternatives, additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash
payment obligations and covenants that restrict our ability to
operate as a business; and strategic partnerships may result in royalties or other terms which reduce our economic potential from products under development.

During
the nine months ended September 30, 2007, operating activities used $30.6 million of cash. Net cash used by operating activities during this period resulted
primarily from a net loss of $41.2 million, partially offset by non-cash charges for depreciation and amortization of $7.6 million, non-cash charges for
stock-based compensation of $1.9 million, non-cash charges for debt refinancing of $1.1 million and non-cash interest expense of $0.7 million.

During
the nine months ended September 30, 2007, investing activities used $0.7 million in cash, primarily for purchases of equipment incurred in connection with our
commercial manufacturing facility for Imagify.

During
the nine months ended September 30, 2007, financing activities provided $11.1 million in cash primarily due to proceeds from a common stock offering of
$18.7 million and borrowings under a capital equipment line of $0.9 million, offset by payments on long term obligations of $6.9 million and dividend payments on our convertible
exchangeable preferred stock of $1.7 million.

31

---



Based
upon our current plans, we estimate our quarterly cash spending for operating activities will range between approximately $11 to $14 million in the fourth quarter of 2007.
In addition, we anticipate payments in the fourth quarter of 2007 of approximately $1.7 million for repayments of debt and approximately $0.6 million for dividends on outstanding
preferred stock. We anticipate that our capital expenses will not exceed $1.0 million for the balance of 2007. These operating and capital cost estimates include costs in preparation of the
commercialization of Imagify and costs to advance other potential product candidates. The estimates include costs necessary to support qualification of our commercial manufacturing facility as needed
for an Imagify NDA submission in the U.S. and a MAA submission in Europe.

In
November 2007 the Company's board of directors declared a quarterly dividend on the preferred stock for all holders as of November 15, 2007. This dividend, which totaled
$0.6 million in the aggregate, will be paid on December 1, 2007.

Under
our amended license agreement with GE Healthcare AS, a division of General Electric Company ("GE"), we are scheduled to make a series of six consecutive quarterly payments of
$0.9 million due on the first day of the third month of each calendar quarter, commencing June 1, 2008. As of September 30, 2007, $1.7 million has been included in the
current portion of long-term obligations. Under the agreement we also agreed to pay GE $5.0 million upon
commercial approval (defined as the first to occur of the approval of a New Drug Application in the United States or the approval of a Marketing Authorization Application in Europe) of Imagify and
$5.0 million upon the one year anniversary of such commercial approval. The latter two $5.0 million payments are contingent upon achievement of future milestone events and, accordingly,
have not been recorded at this time.

Under
our amended patent transfer agreement with Bayer Schering Pharma AG ("Bayer"), we are scheduled to make a $1.0 million payment in May 2008 and a $1.0 million
payment in May 2009.

On
June 15, 2007, the Company sold 7,694,220 units, each unit consisting of (i) one share of common stock and (ii) one warrant to purchase 0.4 shares of common stock
at an exercise price of $3.10 per share, for a purchase price of $2.60 per unit, resulting in aggregate gross proceeds to the Company of approximately $20.0 million (net proceeds of
approximately $18.7 million after deducting underwriting discounts and commissions and estimated offering expenses). The shares of common stock and warrants were immediately separable and were
issued separately. The warrants will be exercisable on December 15, 2007 and until June 15, 2012.

On
each of May 18, 2007, March 28, 2007 and January 5, 2007, we entered into promissory notes with General Electric Capital Corporation ("GE Capital") each of which
totaling in aggregate original principal amount approximately $0.3 million for equipment already purchased by us. The promissory notes include annual interest rates of 10.55%, 10.41% and
10.60%, respectively, and are payable over 42 consecutive months. The promissory notes are secured by the equipment financed pursuant to the terms of our Master Security Agreement with GE Capital. The
promissory notes are subject to acceleration upon certain customary events of default, including the failure to make timely payments of principal and interest.

Effective
June 1, 2006, we entered into an agreement to license on a non-exclusive basis various ultrasound-related intellectual property from Bracco International BV,
or Bracco. In consideration the non-exclusive license of these patents, we agreed to pay Bracco up to a total royalty of Euros 3.0 million, of which Euros 0.5 million was
paid in June 2006. An additional Euros 2.5 million is payable upon our achievement of certain defined regulatory milestones. We also agreed to pay a royalty on future Imagify revenue, up
to a maximum royalty amount of Euros 10.0 million, less a portion of the above-referenced milestone payments. Whereas the other obligations are contingent upon the outcome of future events,
they have not been recorded at this time.

32

---



In
2005 and 2006, we borrowed an aggregate of $7.0 million under an equipment financing line with Oxford Finance Corporation. As of September 30, 2007, net of repayments,
we had $3.9 million outstanding. Borrowings are collateralized by the equipment financed, with repayment due in monthly installments over 36 to 48 months, with the last such repayment
scheduled for March 2010. Interest rates
on these borrowings were fixed at the time of each borrowing and range from 10.3% to 10.9% Loan amounts are subject to acceleration upon certain customary events of default, including failure to make
timely payments of principal and interest.

In
March 2005 we borrowed $2.0 million under a loan agreement with MassDevelopment to help finance certain tenant improvements to our commercial manufacturing facility in
Tewksbury, Massachusetts. The loan is secured by certain improvements made at the facility, interest accrues at 5.0% per annum with retroactive adjustments to 9.0% in the event we achieve positive
operating cash flow, as defined in the agreement, prior to repayment of the loan. The repayment of principal and accrued interest coincides with the original term of the Tewksbury lease, which was
five-years, nine-months with options to extend the lease for up to two additional five-year terms. Accrued principal and interest are being repaid on a monthly
basis such that the total amount outstanding fully amortize over the balance of the term in equal installments. The loan is subject to acceleration upon certain customary events of default, including
failure to timely pay principal and interest. We began making payments on this loan in May 2007 and as of September 30, 2007, have $2.1 million outstanding under the loan,
including principal and interest.

In
February 2005, we issued 900,000 shares of 6.5% convertible exchangeable preferred stock, our Preferred Stock, at $50.00 per share resulting in net proceeds of approximately
$41.9 million after deducting underwriting discounts, commissions and offering expenses. Each share of Preferred Stock has a liquidation preference of $50.00 per share. Dividends on the
Preferred Stock are cumulative from the date of original issue at the annual rate of $3.25 per share, payable quarterly on the first day of March, June, September, and December. Any dividends must be
declared by our board of directors and must come from funds that are legally available for dividend payments. During 2007, 2006 and 2005, we paid $1.7 million, $2.4 and $2.2 million,
respectively, in dividends on our Preferred Stock. As of September 30, 2007, 690,000 shares of Preferred Stock were outstanding. In November 2007, our board of directors declared a
quarterly dividend on the Preferred Stock for all holders as of November 15, 2007. This dividend, which totals $0.6 million in aggregate, will be paid on December 1, 2007.

We
may elect to automatically convert some or all of the Preferred Stock into shares of our common stock if the closing price of our common stock has exceeded $10.30 per share (150% of
the conversion price) for at least 20 trading days during any 30-day trading period, ending within five trading days prior to notice of automatic conversion. Prior to March 1, 2009,
if we elect to automatically convert, or if any holder elects to voluntarily convert, the Preferred Stock, we will also make an additional payment, the Make-Whole payment, equal to the
aggregate amount of dividends that would have been payable on the Preferred Stock so converted from the original date of issuance through and including March 1, 2009, less any dividends already
paid on the Preferred Stock. This additional payment is payable by us, at our option, in cash, in additional shares of its common stock, or in a combination of cash and shares of common stock. We have
reserved a maximum of approximately 0.6 million shares of common stock for issuance under this Make-Whole provision.

Through
September 30, 2007, 210,000 shares of Preferred Stock have been voluntarily converted into 1,530,612 shares of our common stock. In connection with such conversions, we
issued an additional 347,603 shares of our common stock in satisfaction of the required Make-Whole payment.

We
may elect to redeem the Preferred Stock at declining redemption prices on or after March 6, 2009. The Preferred Stock is exchangeable, in whole but not in part, at our option
on any dividend payment date beginning on the exchange date (March 1, 2006) for our 6.5% convertible subordinated debentures, or Debentures, at the rate of $50 principal amount of Debentures
for each share of

33

---



Preferred
Stock. The Debentures, if issued, will mature 25 years after the exchange date and have terms substantially similar to those of the Preferred Stock.

In
2004 and 2005 we borrowed an aggregate of $10.5 million under an equipment financing line with General Electric Capital Corporation. During 2007 we borrowed approximately
$0.9 million and as of September 30, 2007, net of repayments, we had $5.6 million outstanding. Borrowings are collateralized by the equipment financed with repayment due in
monthly installments over 36 to 48 months, with the last such repayment scheduled for December 2010. Interest rates on these borrowings were fixed at the time of each borrowing and range
from 8.7% to 10.7%. The loans under this line are subject to acceleration upon certain customary events of default, including failure to timely pay principal and interest.

In
July 2004, we entered into a collaboration, license and supply agreement with Nycomed in which we granted Nycomed rights to develop and market Imagify in Europe. Under the
original terms of this agreement, Nycomed paid us license fees and research and development payments totaling $12.0 million. The original agreement also provides for Nycomed to pay to us up to
$58.0 million in milestone payments upon achievement of certain regulatory milestones and sales goals. Under the agreement, Nycomed has agreed to pay us to manufacture Imagify for them and to
pay us royalties on Nycomed's sales of Imagify. In October 2005 and February 2006 our agreement with Nycomed was amended such that Nycomed paid us an aggregate of $2.0 million for
activities associated with creating a brand name for Imagify and to fund certain activities associated with the qualification of our manufacturing facility. Payments received pursuant to these
amendments are considered advances against a future milestone payment for a European regulatory filing, or MAA, and are deducted from the potential $58.0 in milestone payments which may be earned
under the agreement.

In
July 2004, we entered into a lease agreement for 58,000 square feet of commercial manufacturing space in Tewksbury, Massachusetts. This lease has a five year, nine month term
with options to extend the lease for up to two additional five-year terms at predetermined rental rates. Initially, we received nine months of occupancy free of base rent, followed by base
rent of approximately $0.4 million in aggregate for the next twelve months with scheduled annual rental rate increases thereafter.

Shelf Registration Statement

We have on file with the U.S. Securities and Exchange Commission, or SEC, a "universal shelf" registration statement on Form S-3 (Registration
No. 333-134263) and a universal shelf registration statement on Form S-3 (Registration No. 333-123854), which provide for the offer, from time
to time, of common stock, preferred stock, debt securities and warrants up to an aggregate remaining availability of approximately $3.5 million and $27.3 million, respectively, net of
financing amounts previously executed under these registration statements and amounts reserved for up to $30.0 million in potential financing under the equity line of credit arrangement we
entered into in August 2006 with Azimuth Opportunity, Ltd, which expires in February 2008. The SEC declared the shelf registration statements effective on August 18, 2006
and April 15, 2005, respectively. Subject to market conditions and our capital needs, and so long as we are then eligible to use the registration statements under SEC rules, we may again seek
to use any remaining availability under the shelf registration statements by making an offering of securities covered for sale under the registration statements. In addition, we may amend our shelf
registration statements or file a new shelf registration statement to increase our potential access to capital. If we elect to raise additional capital using a shelf registration statement, we
may use the net proceeds from the sale of these securities for general corporate purposes, which may include funding clinical trials, research and development, regulatory activities, acquisitions,
including acquisitions of companies, products, intellectual property or other technology, repayment or refinancing of existing indebtedness, investments, capital expenditures, repurchase of our
capital stock and for any other purposes that we may specify in any prospectus supplement.

34

---



Equity Line of Credit Arrangement

In August 2006, we entered into what is sometimes termed an equity line of credit arrangement with Azimuth Opportunity Ltd. The arrangement provides
that, upon the terms and subject to the conditions set forth therein, Azimuth is committed to purchase up to $30.0 million of our common stock, or up to a maximum of approximately
5.8 million shares of common stock, whichever occurs first, over the 18-month term of the agreement. From time to time during the term of the agreement, and at our sole discretion,
we may present Azimuth with draw down notices requiring Azimuth to purchase our common stock at a per share purchase price equal to the daily volume weighted average price of the common stock, less a
discount ranging from 3.875% to 5.875%, based on the volume weighted average price of the common stock. As a result, our existing common stockholders will experience immediate dilution upon the
purchase of any shares of our common stock by Azimuth under this agreement. The sale of shares under this equity line will be dilutive to existing stockholders and may have an adverse effect on the
price of our securities. The arrangement includes provisions under which we may, if elected, terminate this equity line of credit without financial penalty. We have not sold any stock under this
agreement through September 30, 2007.

Off-Balance Sheet Financing Arrangements

We currently do not have any special purpose entities or off-balance sheet financing arrangements other than operating leases.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2007 and the effect such obligations are expected to have on our liquidity
and cash flow in future periods:

Payments due by period (in 000's)Contractual obligations

Total

2007

2008 -
2009

2010 -
2011

2012 and
beyondLong-Term Debt

$
12,902

$
1,773

$
9,271

$
883

$
975Capital Lease Obligations


82


8


65


9


Operating Lease Obligations


14,084


734


6,265


5,653


1,432Purchase Obligations


196


196








Other Long-Term Liabilities


7,500





7,500





Total

$
34,764

$
2,711

$
23,101

$
6,545

$
2,407


Long-Term
Debt of $12.9 million includes $6.1 million in principal and interest payable to General Electric Capital Corporation and $4.3 million in
principal and interest payable to Oxford Finance Corporation under equipment loans with payments due in monthly installments over 36 to 48 months, collateralized by the equipment financed. Also
included under Long-Term Debt is $2.5 million in principal and interest due under the MassDevelopment loan, under which we borrowed $2.0 million to finance improvements to
our commercial manufacturing facility. Interest accrues under the loan at 5.0% per annum with retroactive adjustments to 9.0% in the event we achieve positive operating cash flow, as defined in the
agreement, prior to repayment of the loan. The repayment of principal and interest coincides with the term of the facility lease which had an initial five-year, nine-month
term. Acusphere began making payments on the loan in May 2007. All the loans are subject to acceleration upon certain events of default, including failure to make timely payments of principal
and interest.

Capital
Lease Obligations as classified pursuant to FASB Statement of Financial Accounting Standards No. 13,Accounting for Leasesrelate to leases for business equipment. We leased capital equipment through Banc of America Leasing Corporation. The remaining monthly payments range from $460 to $1,019 with maturities through
June 2010.

35

---



Our
operating lease obligations of $14.1 million relate primarily to our headquarters and manufacturing facility leases under which we pay monthly rent. Our Watertown,
Massachusetts headquarters lease has
an original term of 10 years, which began in December 2001, and which was extended by nine months during 2005. The lease for our commercial manufacturing space in Tewksbury,
Massachusetts has an initial five year, nine month term, which began in July 2004, with options to extend the lease for up to two additional five-year terms at predetermined rental
rates.

Purchase
Obligations include one purchase order to a supplier for material.

Other
Long-Term Liabilities of $7.5 million includes: (i) a $1.0 million payment due in May 2008 and $1.0 million payment due in
May 2009 to Schering pursuant to our amended intellectual property acquisition agreement and (ii) payments in connection with our amended License Agreement with GE in the amount of six
consecutive quarterly installments of $0.9 million due on the first day of the third month of each calendar quarter, commencing June 1, 2008. The $7.5 million amount excludes
contingent milestone and royalty obligations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to revenues, accrued expenses, fair valuation
of stock related to stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue.We recognize revenue from license arrangements in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition("SAB 104") and FASB Emerging Issue Task Force Issue No. 00-21,Accounting for Revenue
Arrangements with Multiple Deliverables("EITF 00-21"). We recognize revenue from license payments not tied to achieving a specific performance milestone ratably
over the period over which we are obligated to perform services. The period over which we are obligated to perform services is estimated based on available facts and circumstances. We recognize
revenue from performance payments, when such performance is substantially in our control and when we believe that completion of such performance is reasonably probable, ratably over the period over
which we estimate that we will perform such performance obligations. Substantive at-risk milestone payments, which are based on achieving a specific performance milestone when performance
of such milestone is contingent on performance by
others or for which achievement can not be reasonably estimated or assured, are recognized as revenue when the milestone is achieved and the related payment is due, provided that there is no
substantial future service obligation associated with the milestone. We do not recognize revenue in connection with license arrangements until payments are collected or due and reasonably assured of
being collected. In addition, we do not recognize revenue in circumstances where the arrangement includes a refund provision until the refund condition is no longer applicable unless, in our judgment,
the refund circumstances are within our operating control and unlikely to occur. Payments received in advance of being recognized as revenue are deferred.

In
connection with feasibility studies, contract amounts which are not due until the customer accepts or verifies the research results are not recognized as revenue until customer
acceptance, assuming collectibility is reasonable assured.

36

---



We
are recognizing collaboration revenue of $12.0 million associated with the initial license and performance-based payments under the Nycomed agreement based on an estimated
recognition period of fifty-four months which is the period over which we estimated that we are obligated to perform services supporting the agreement. Estimation of this development
period involves many assumptions, including estimates relating to completion of activities for which we are reliant on Nycomed to achieve. Our estimated development recognition period may change again
if facts and circumstances change. Were the estimated development period to be extended, we may be required to record a reduction in cumulative revenue recognized in our statement of operations in the
period in which the change in development period is determined.

Our
agreement with Nycomed has been modified such that Nycomed has paid us $0.2 million for activities associated with creating a brand name for Imagify and related trademark
activities and paid us $1.8 million to support the validation of our commercial manufacturing facility for Imagify. These amounts were originally scheduled to be paid to us upon Nycomed's
filing for regulatory approval of Imagify in Europe. While the amounts are not refundable, we have deferred recognition of these amounts until after the original regulatory filing milestone has been
achieved. Payments received for current and potential HDDS and PDDS feasibility studies, which are offset by costs incurred for such studies, are recognized as revenue over the estimated performance
period of each such study. A change in these estimates could result in a significant change to the amount of revenue recognized in future periods. In addition, if the Nycomed collaboration agreement
is terminated for reasons other than certain non-performance by us, we would recognize the remainder of the payments we have received or otherwise expect to collect over the amortization
period at the time of termination. We will not recognize revenue associated with the potential additional $56 million in milestone-based payments that may be earned under the Nycomed agreement
until the underlying regulatory and sales milestones are achieved.

Property and Equipment.Property and equipment are recorded at cost and depreciated over their estimated useful lives of
three to five years using the straight-line method. The majority
of our equipment is related to our ongoing research and development activities, including equipment which, subject to regulatory approvals, we intended to use for commercial manufacture of Imagify. We
consider that this equipment is placed in service when operation of the equipment is started-up and begin depreciating the equipment at this time. The equipment in our commercial
manufacturing facility is currently undergoing research and development related activities that result in wear and tear on the equipment including include ongoing calibration and testing.

Leasehold
improvements and equipment under capital leases are recorded at cost. We depreciate leasehold improvements and equipment under capital leases over the lesser of their useful
lives or the remainder of their respective lease terms. We began depreciation of leasehold improvements at our Tewksbury facility in October 2005 upon receipt of an occupancy permit and taking
occupancy of the facility. Our leasehold improvements costs on this facility approximate $30.5 million and are being depreciated ratably over remaining term of our present lease, the initial
term of which is scheduled in expire in April 2010. We believe that the use of the initial term of the lease for the depreciation period, rather than assuming that the lease term is renewed, is
appropriate given the inherent uncertainties with a product such as Imagify, which requires regulatory approvals before it can be marketed. The Risk Factors included under Section 1A of
Part II of this document discuss the uncertainties associated with Imagify.

Accrued Expenses.As part of the process of preparing consolidated financial statements we are required to estimate accrued
expenses. This process involves identifying services which have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each
balance sheet date in our consolidated financial statements. Examples of estimated expenses for which we accrue include professional service fees, such as lawyers and accountants, and contract service
fees such as amounts paid to clinical monitors, data management

37

---



organizations
and investigators in conjunction with clinical trials, and fees paid to consultants used in the qualification of our commercial manufacturing facility for Imagify. In connection with
such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers. The
majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify certain costs which have begun to be incurred or we under- or
over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be too low or too high. The date on which certain services
commence, the level of services performed on or before a given date and the cost of such services are often judgmental, but have not varied materially from actual costs incurred. We make these
judgments based upon the facts and circumstances known to us in accordance with accounting principles generally accepted in the United States of America.

Stock-Based Compensation and Other Equity Instruments.We account for stock-based compensation in accordance with the fair
value recognition provisions of SFAS 123R,Share Based Payment. Under SFAS 123R, stock-based compensation cost is measured at the grant
date based on the value of the award and is recognized as expense over the appropriate vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including
estimating the expected term of stock options, the expected volatility of our stock and expected dividends. In addition, judgment is required
in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates or different key assumptions were used, it could have a
material effect on our Consolidated Financial Statements. See Note 3 of the Notes to the Consolidated Financial Statements for additional information regarding stock-based compensation expense.

Prior
to adopting the provisions of SFAS 123R, we recorded estimated compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant
to Accounting Principles Board Opinion 25 ("APB 25"),Accounting for Stock Issued to Employeesand provided the required pro forma disclosures of
SFAS 123R. Because we established the exercise price based on the fair market value of our stock at the date of grant, the stock options had no intrinsic value upon grant, and therefore no
estimated expense was recorded for stock option expense prior to adopting SFAS 123R. Conversely, when the exercise price for accounting purposes was below fair value of our common stock at the
date of grant, a non-cash charge to compensation expense was recorded ratably over the term of the option vesting period in an amount equal to the difference between the value calculated
using the exercise price and the fair value. We did issue options prior to its initial S-1 filing in July 2003 at values less than fair market. These grants resulted in the
recording of deferred compensation, all of which was expensed as of September 30, 2007. Stock options are not included in the calculation of diluted net loss per common share due to the
anti-dilutive effect of the stock options for all periods presented.

Accounting
for equity instruments granted or sold by us under Accounting Principle Board Opinion 14 ("APB 14"),Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants, APB 25, SFAS 123R and EITF 96-18 requires fair value estimates of the equity instrument granted or sold. If our
estimates of the fair value of these equity instruments are too high or too low, it would have the effect of overstating or understating expenses. When equity instruments are granted or sold in
exchange for the receipt of goods or services and the value of those goods or services can be readily estimated, we use the value of such goods or services to determine the fair value of the equity
instruments. When equity instruments are granted or sold in exchange for the receipt of goods or services and the value of those goods or services can not be readily estimated, as is true in
connection with most stock options and warrants granted to employees or non-employees, we estimated the fair value of the equity instruments based upon consideration of factors which we
deemed to be relevant at the time using cost, market and/or income approaches to such valuations.

38

---



The
fair values of all stock option grants issued were determined using a Black-Scholes model in which we are required to make assumptions for the risk-free interest rate,
the expected volatility of the underlying stock, forfeiture rates and expected life of option grants. The risk-free rates are the weighted average of the yield rates on 5-year
U.S. Treasury notes on the dates of the stock option grants. We used the historical volatility of our market-traded stock for the expected volatility assumption. Forfeiture rates are calculated based
on actual historical forfeitures. The expected life of employee stock options represents the weighted-average period the stock options are estimated to remain outstanding. The expected life of
employee stock options is, in part, a function of the options' remaining contractual life and the extent to which the option is in-the-money (i.e., the average stock price
during the period is
above the strike price of the stock option). We estimate that, based on these variables, options are likely on average to be exercised in approximately 5 years from the date of grant.

Derivative Liabilities.The terms of our February 2005 convertible preferred stock offering and our March 2005
MassDevelopment loan agreement contain features considered to be embedded derivatives which are recorded at estimated fair value in accordance with FAS 133. The estimation of this fair value
includes various assumptions and estimates, including assumptions and estimates of risk free interest rates, stock price volatility and the timing of future preferred stock conversions. Changes in
these estimates and assumptions can increase or decrease the value of this derivative liability. The unrealized gain or loss of the derivative financial instrument is included in our statement of
operations. The convertible preferred stock terms include a dividend make-whole payment provision, which has been initially recorded at its estimated fair value. This derivative liability
is reduced upon conversion of the preferred stock as well as dividends declared by our board of directors, if any. The MassDevelopment loan agreement includes a provision for a retroactive interest
rate increase in the event that we achieve certain defined positive operating cash flows. The initial fair value of the MassDevelopment loan derivative is being amortized over a term beginning with
the loan agreement effective date and ending with the estimated payment date of the retroactive interest. The fair value of both derivative liabilities are re-measured at each reporting
period.

Income Taxes.As part of the process of preparing our consolidated financial statements we are required to estimate our
income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from
differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. In addition, as of December 31, 2006, we had federal tax net
operating loss carryforwards of $70.8 million, which expire through 2026. We also have research and development credit carryforwards of $8.1 million. We have recorded a valuation
allowance to fully offset against these otherwise recognizable net deferred tax assets due to the uncertainty surrounding the timing of the realization of the tax benefit. In the event that we
determine in the future that we will be able to realize all or a portion of its net deferred tax benefit, an adjustment to deferred tax valuation allowance would increase net income in the period in
which such a determination is made. The U.S. Tax Code contains provisions that may limit the utilization of net operating loss carryforwards and credits available to be used in any given year in the
event of significant changes in ownership interest, as defined.

Recently Issued Accounting Pronouncements

In September 2006, FASB issued SFAS (FAS) No. 157,Fair Value Measurements, which is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The purpose of FAS 157 is to clarify and set forth
consistent rules for defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles and expanding disclosures about fair value measurements.
FAS 157 applies under other accounting pronouncements that require or permit fair value measurements where those accounting pronouncements have determined that fair value is the relevant
measurement attribute. FAS 157 does

39

---



not
require any new fair value measurements, but for some entities the application of FAS 157 could change current practice. We are currently assessing what impact, if any, the adoption of this
statement will have on our consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities,which
is effective as of the beginning of an entity's first fiscal year beginning after November 15, 2007. This statement allows the measurement at fair value of financial instruments and certain
other items that are currently not required to be measured at fair value. The objective of FAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this
Statement permits the measurement of eligible items at fair value at specified election dates, with unrealized gains and losses on the items for which the fair value option has been elected reported
in earnings at each subsequent reporting date. We are currently assessing what impact, if any, the adoption of this statement will have on our consolidated financial statements.

In
June 2007, the Emerging Issues Task Force issued EITF 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services Received for
Use in Future Research and Development Activities, which is effective as of the beginning of an entity's first fiscal year beginning after December 15, 2007. This
abstract discusses the treatment of the nonrefundable portion of advance payments made pursuant to an executory contractual arrangement for future research and development activities. Nonrefundable
advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense
as the related goods are delivered or the related services are performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be
charged to expense. We are currently assessing what impact, if any, the adoption of this statement will have on our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not used derivative financial instruments for speculative or trading purposes. However, we are exposed to market risk related to changes in interest
rates. Our current policy is to maintain an investment portfolio consisting mainly of U.S. money market and government-grade securities, directly or through managed funds, with maturities of one year
or less. Our cash is deposited in and invested through highly rated financial institutions in North America. Our cash equivalents are subject to interest rate risk and will fall in value if market
interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at September 30, 2007, we estimate that the fair value of our investment
portfolio would decline by an immaterial amount. We currently have the ability to hold our fixed income investments until maturity, and therefore we do not expect our operating results or cash flows
to be affected to any significant degree by the effect of a change in market interest rates on our investments. Our equipment loans and capital leases are not subject to interest rate fluctuations
because the interest rates are fixed at the time of borrowing.

Effects of Inflation

Our assets are primarily monetary, consisting of cash, cash equivalents and short-term investments. Because of their liquidity, these assets are not
directly affected by inflation. We also believe that we have intangible assets in the value of our technology. In accordance with generally accepted accounting principles, we have not capitalized the
value of this intellectual property on our consolidated balance sheet. Due to the nature of this intellectual property, we believe that these intangible assets are not affected by inflation. Because
we intend to retain and continue to use our equipment, furniture and fixtures and leasehold improvements, we believe that the incremental inflation related to replacement costs of such items will not
materially affect our operations. However, the rate of inflation affects our

40

---



expenses,
such as those for employee compensation and contract services, which could increase our level of expenses and the rate at which we use our resources.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the evaluation date, our disclosure controls and procedures were effective in ensuring that material
information required to be disclosed by us in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, including ensuring that such material information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

41

---





PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

Certain Factors Which May Affect Future Results

Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of
factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risks and uncertainties. The following factors,
among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Such
factors, among others, may have a material adverse effect upon our business, results of operations and financial condition.

In Item 1A ("Risk Factors") of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which was filed with the
Securities and Exchange Commission on March 16, 2007, we
describe risk factors related to the Company. For convenience, our updated risk factors are included below in this Item 1A. Other than the risk factors titled:



there have been no material changes in our risk factors from those disclosed in Part II. Item 1A of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2006.

Risks Related to Our Company

We have not generated any product revenue to date, have a history of operating losses and our capital resources are limited.

We are focused on product development and we have not generated any revenue from commercial sales of our products to date. We have incurred losses each year of
our operations. For the nine months ended September 30, 2007, we had a net loss available to holders of common stock of $42.9 million. At September 30, 2007 we had an accumulated
deficit of $322.3 million. We expect our research and development, general and administrative and sales and marketing expenses will increase over the next several years.

42

---



We
expect to continue to incur losses and capital expenditures for the foreseeable future. We also anticipate cash outflow from debt repayment and payment of other obligations, including
dividends payable on our outstanding shares of 6.5% convertible exchangeable preferred stock. We believe, based on our operating plans, that unless we elect to reduce our current rate of spending and
forego pursuit of milestones on our current schedule, we will, before the end of the second quarter of 2008, require significant additional capital to fund our operations, including developing
products, conducting clinical trials, achieving regulatory approvals, qualifying commercial manufacturing space and, subject to regulatory approval, commercially launching Imagify, or other product
candidates under development or future product candidates. We may raise this additional capital through public or private sales of equity, or from borrowings, or from strategic partners.

As
a result of our limited capital resources, we may elect to delay the funding of certain development activities, including those leading to the submission of our NDA for Imagify, which
would result in a delay in the commercialization of Imagify. Any such delay in the submission of an NDA or commercialization of Imagify would have a material adverse impact on our business and would
likely have a material adverse effect on the market price of our common stock. To address our capital needs, we may elect to raise funds through public or private sales of equity or from borrowings or
from strategic partners. Additional equity financing, if available, may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants
that restrict our ability to operate our business; and strategic partnerships, if available, may result in royalties or other terms which reduce our economic potential from products under development.
In addition, third parties may attempt to acquire us at valuations our board of directors or stockholders may not find attractive. If our capital resources are not sufficient to fund our planned
operations for a twelve month period at the time the audit for our 2007 financial results is complete, our auditor will likely include in its audit
report, to be included in our annual report on Form 10-K, an explanatory paragraph regarding substantial doubt relating to our ability to continue as a going concern. Any such
qualification of the report of our auditors may have a material adverse effect on our ability to raise capital and may have a material adverse effect on the market price of our common stock.

We need to allocate significant amounts of our available capital resources to make payments on our outstanding indebtedness and equipment lease
obligations, our patent transfer agreement with Schering Aktiengesellschaft, our patent license agreement with GE and as dividends on our 6.5% convertible exchangeable preferred stock, which in turn
could reduce our financial flexibility and ability to fund other activities.

As of September 30, 2007, we had approximately $18.1 million in aggregate principal indebtedness outstanding related to capital lease obligations,
notes payable, and other long-term obligations. As of November 5, 2007, we had outstanding 690,000 shares of our 6.5% convertible exchangeable preferred stock, which shares accrue
cumulative cash dividends at the annual rate of $3.25 per share, payable quarterly on the first day of March, June, September, and December. These payments will:



To
address our capital needs, we may elect to raise funds through public or private sales of equity or from borrowings or from strategic partners. Additional equity financing, if
available, may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business; and
strategic partnerships, if available, may

43

---



result
in royalties or other terms which reduce our economic potential from products under development.

Failure to obtain regulatory approvals for our product candidates under development, in particular our lead product candidate Imagify, for which we
missed endpoints in each of our pivotal trials, would have a material adverse effect on our business.

We must receive regulatory approval of each of our product candidates before we can commercialize or sell that product candidate. The pre-clinical
laboratory testing, formulation development, manufacturing and clinical trials of any product candidates we develop independently or in collaboration with third parties, as well as the distribution
and marketing of these product candidates, are regulated by numerous federal, state and local governmental authorities in the United States, principally FDA, and by similar agencies in other
countries. The development and regulatory approval process takes many years, requires the expenditure of substantial resources, is uncertain and subject to delays, and could thus delay our receipt of
revenues, if any, from any of our product candidates.

The
data obtained from clinical and pre-clinical activities are subject to varying interpretations that could delay, limit or prevent regulatory agency approval. In
particular, we can not assure you that our planned NDA for Imagify will be accepted by FDA nor can we assure you that our Imagify clinical results will successfully address the requirements of FDA
sufficiently for us to obtain regulatory approval. No product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA
standards. FDA analysis of results include both quantitative and qualitative analysis. In both our RAMP-1 and RAMP-2 clinical trial results, we achieved the principal primary
endpoint of accuracy but failed to achieve one of the two component primary endpoints in each trial (sensitivity in RAMP-1 and specificity in RAMP-2). The FDA may look at these
trials separately rather than in their totality and may not approve Imagify based upon these missed endpoints. We cannot predict whether FDA will approve Imagify based upon the available results or
whether FDA will seek additional data as a condition to approval or whether they will approve Imagify at all.

Our
RAMP-1 and RAMP-2 clinical trial results are based upon our statistical analysis plans for those trials. These statistical analysis plans, including
calculations of statistical significance, were created based on a variety of factors, including feedback from our discussions with FDA, the input of our regulatory consultants and our own knowledge
and past experience in these and similar matters. We anticipate that the FDA will evaluate the quality and independence of the manner in which our Imagify clinical trials were conducted. In recent
years, other companies seeking approval for their contrast agents have encountered difficulties convincing FDA that the comparative or truth standards that they used in their clinical trials met
acceptable levels of quality, consistency or other standards acceptable to the FDA. In such cases, these issues were reported to be contributing factors in the failure of such product candidates to be
approved. If the FDA, upon review, has concern about the quality of the manner in which our RAMP-1 or RAMP-2 trial was conducted, or has concerns about the results of the
nuclear stress tests or coronary angiography used as a comparator and truth standard in these trials, this could delay or prevent FDA approval of Imagify based upon our current trial results. There
can be no assurance that FDA will accept our statistical analysis without modification. How, when, or if such matters are resolved may affect whether Imagify is approved for the indication that we are
seeking, the timing of such approval, or whether Imagify is approved at all. In addition, in conjunction with approving products, it is common for regulatory agencies to impose limits on how such
products can be used and marketed. We anticipate that if and when Imagify and other product candidates are approved that the initial use and marketing of these products may be limited at least until
such time as we conduct additional clinical studies or information otherwise becomes available to address the underlying reasons for such limitations.

44

---



We
may encounter delays or rejections based on changes in regulatory agency policies or personnel during the period in which we develop a drug or the period required for review of any
application for regulatory agency approval of a particular compound. Our continuing efforts to comply with these changes could lead to delays or rejections of our clinical trials. We also may
encounter delays in the event we are unable to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials. In addition, we
rely on a number of third parties, such as clinical research organizations, to help support the clinical trials by performing independent clinical monitoring, data acquisition and data evaluations.
Any failure on the part of these third parties could delay the regulatory approval process.

Failure
to obtain regulatory approval or any delay or setback in obtaining regulatory agency approvals could:



Failure
to obtain approval for our lead product candidate, Imagify, or delay in such approval, would delay our receipt of product revenues and would have a material adverse affect our business,
financial condition and results of operations. Our stock price would also be materially adversely affected.

Adverse events are likely to be encountered in our clinical trials and these events could delay, limit or prevent regulatory approval.

Many of the patients in our Imagify clinical trials have coronary artery disease. When we conduct future Imagify clinical studies, patients will be exposed to
potential safety risks associated with a stress test, including risks associated with a pharmacological stressor, and Imagify. Given the nature of Imagify clinical trials, including the cumulative
administration of Imagify to larger numbers of at-risk patients and administering Imagify to patients with coexisting disease, adverse events are expected to be encountered during the
clinical trials. Adverse events are also likely to be encountered in clinical trials for our other products, which clinical trials may also include at-risk patients. When significant
adverse events are detected and these events are attributable to our products, such events could delay, limit or prevent regulatory agency approval.

FDA has required warning labels be added to product labeling for certain contrast agents as a result of serious adverse events and, if approved, our
Imagify product candidate may require similar labeling.

FDA is investigating reports of deaths and heart problems in patients treated with contrast agents and as a result, has required warning labels to be added to
product labeling for certain ultrasound contrast agents which are approved for use in clinically unstable and acutely ill patients. These FDA-approved agents, Optison, marketed by GE
Healthcare and Definity, marketed by Bristol-Myers Squibb, are injected into patients prior to a cardiac ultrasound to improve visibility of the image. While we believe that Imagify is structurally
different from these commercially-available ultrasound contrast agents, we cannot assure you that, if approved, Imagify will not be required to carry a similar warning.

Our collaborative partners may not obtain regulatory approvals in other countries, which may have an adverse effect on our business.

We cannot be certain that we or our partners will obtain any regulatory approvals in other countries and the failure to obtain these approvals would have a
material adverse affect on our business, financial condition and results of operations. In order to market our products outside of the United States, we and our current, and potential future,
collaborative partners must establish and

45

---



comply
with numerous and varying regulatory requirements of other countries regarding safety and efficacy. The approval procedures vary among countries and can involve additional product testing and
additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval process in other
countries may include all of the risks associated with obtaining FDA approval detailed above. Approval by FDA does not ensure approval by the regulatory authorities of other countries. In addition,
many countries outside the United States require a separate review process prior to marketing to determine whether their national health insurance schemes will pay for newly approved products, as well
as the price which may be charged for a product.

We may need to enroll more patients in future clinical trials, and any such additional enrollment would require additional expenditures, which may be
material, and would likely result in a delay of our submitting an NDA with the FDA for Imagify.

If discussions with FDA lead us to conclude that further clinical trials of Imagify are required to achieve NDA approval, such trials may affect the timing of NDA
submission or approval and would incur significant costs. We cannot assure that the performance of additional trials would lead ultimately to NDA approval. Moreover, we currently do not possess
sufficient inventory of Imagify to conduct any such trial, and would need to contract for the manufacture of such material. We may not be able to obtain sufficient quantity of such material in a
timely fashion or on commercially reasonable terms, or at all. Our inability to conduct additional clinical trials for Imagify in a timely fashion, or at all, resulting from of our inability to
manufacture or obtain clinical trial materials would have material adverse effect on our business.

If we cannot raise additional capital on acceptable terms, we may be unable to complete planned clinical trials, obtain regulatory approvals or
commercialize our product candidates.

We will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our
product candidates to market and
to establish commercial manufacturing, marketing and sales capabilities. Our future capital requirements will depend on many factors, including the:



We
may seek additional funding through strategic collaborations or through private or public sales of our securities or by licensing all or a portion of our technology. This funding may
significantly dilute existing stockholders or may limit our rights to our technology.

We
cannot assure you that we can obtain additional funding on reasonable terms, or at all. If we raise additional funds by issuing equity securities, our stock price may decline, our
existing stockholders may experience significant dilution, and the newly issued securities may have rights superior to those of our common stock. If we raise additional funds by issuing debt, we may
be subject to limitations on our

46

---



operations
and such debt may have rights senior to the debentures, if issued. If we cannot obtain adequate funds, we may:



Any
of these could have a material adverse effect on our business, financial condition and results of operations. Our stock price could also be materially adversely affected.

Our products, if approved, may fail to achieve market acceptance.

There can be no assurance that any products we successfully develop, if approved for marketing, will achieve market acceptance or generate significant revenues.
Each of our product candidates is intended to replace or alter existing therapies or procedures, and hospitals, physicians or patients may conclude that these products are less safe or effective or
otherwise less attractive than these existing therapies or procedures. For example, our lead product candidate, Imagify, is a cardiovascular drug for use in ultrasound imaging procedures which will
compete with existing nuclear imaging and cardiac ultrasound. Hospitals, physicians or patients may prefer these existing procedures to Imagify-enhanced cardiac stress ultrasound imaging. If our
products do not receive market acceptance for any reason, it would adversely affect our business, financial condition and results of operations. In such event, we may elect to conduct additional
clinical trials designed to demonstrate the effectiveness of Imagify in circumstances not studied in our Phase 3 clinical trials. Any such studies will likely be expensive and time consuming. Further,
our competitors may develop new technologies or products that are more effective or less costly, or that seem more cost-effective, than our products. We can give no assurance that
hospitals, physicians, patients or the medical community in general will accept and use any products that we may develop.

We have never manufactured any of our product candidates in commercial quantities, and if we fail to develop an effective manufacturing capability for
our products, including our lead product candidate Imagify, we may be unable to commercialize these products.

We have no experience in manufacturing our products for commercial use and limited experience in designing equipment for the manufacture of our products. We are
working to start-up and qualify operations at a commercial manufacturing facility in Tewksbury, Massachusetts and to demonstrate that we can produce Imagify at a commercial manufacturing
scale prior to our filing of a NDA for Imagify and, subject to required regulatory approvals, we intend to manufacture Imagify in this facility for commercial use. We can not assure you that we will
be able to obtain the necessary regulatory approvals for such commercial manufacture, at all or in a timely or economical manner. Our intention to manufacture Imagify or other products exposes us to
the following risks, any of which could delay or prevent the approval of our products by FDA or corresponding state and foreign agencies, or the commercialization of our products, or result in higher
costs or inability to meet demand for Imagify leading to potential revenue loss, and any of which would have a material adverse impact on our business, financial condition and results of operations.

47

---





We
have a single manufacturing facility. This facility and the manufacturing equipment we use to produce Imagify would be difficult to replace and could require substantial
lead-time to repair or replace in the event of a regulatory, manufacturing, catastrophic event or similar problem. In such event, we would be forced to rely on third-party manufacturers
and there would likely be substantial delay before we would be able to restart production. Although we possess insurance for damage to our property and the disruption of our business from casualties,
such insurance may not be sufficient to cover all of our potential losses, including potential damage to our reputation, and may not continue to be available to us on acceptable terms, or at all. In
addition, future growth may outpace our manufacturing capacity, in which event we would need to locate, obtain and build-out additional space. New or alternative facilities may not be
available to us on acceptable terms. Even if we are able to identify such new or alternative facilities, we may incur additional costs and we may experience a disruption in the supply of our products
until those facilities are available.

Failure to manufacture our products in commercial quantities or at commercially reasonable costs could damage our European partnership.

Under the terms of our collaboration agreement with Nycomed, we are responsible for the commercial manufacture of Imagify for marketing and sale by Nycomed in
Europe. Failure to manufacture Imagify in a timely manner or on an economic basis, or in sufficient quantities, could jeopardize our relationship with Nycomed. We do not currently have a European
sales force, nor do we

48

---



have
experience with regard to the commercialization, marketing, sale or distribution of pharmaceutical products in Europe, and we rely entirely on Nycomed for this expertise. Any termination of our
relationship with Nycomed would have a material adverse impact on our business, financial condition and results of operations.

We may not be able to manufacture our products in commercial quantities, which would prevent us from marketing our products.

To date our product candidates have been manufactured in small quantities for pre-clinical and clinical trials. If any of these product candidates are
approved by FDA or foreign regulatory authorities for commercial sale, we will need to manufacture them in larger quantities. For Imagify, it is our intention to seek regulatory approval after we have
demonstrated that we can manufacture Imagify at a larger batch scale than is being used for clinical trial materials. Manufacturers often encounter difficulties in achieving volume production, quality
control and quality assurance. Accordingly, we might not be able to manufacture sufficient quantities of drugs to meet our clinical schedules or to commercialize our products. We cannot assure you
that we will be able to successfully increase the manufacturing capacity or manufacture at a larger batch scale, whether on our own or in collaboration with third party manufacturers, for any of our
product candidates in a timely or economic manner, or at all. Significant scale-up of manufacturing may require certain additional validation studies, which FDA must review and approve. If
we are unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a
shortage in supply of that product candidate. Our product candidates require precise, high-quality manufacturing. Our failure to achieve and maintain these high manufacturing standards,
including controlling the incidence of manufacturing errors and maintaining reliable product packaging for diverse environmental conditions, could result in patient injury or death, product recalls or
withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business.

Our
commercial manufacturing facility in Tewksbury, Massachusetts is designed to meet our estimated initial commercial demand for Imagify. The facility is being initially equipped to run
one production line. In order to support greater production capacity, this production line is designed to support a larger lyophilizer (pharmaceutical freeze dryer which can be operated under sterile
conditions) in
addition to the one that has been initially installed. Purchasing, installing and qualifying manufacturing equipment, such as a lyophilizer, typically requires significant lead times and temporary
discontinuation of production. Also in the future we may need to add additional production lines at the Tewksbury site or elsewhere to meet potential commercial demand for Imagify. We have made no
commitment to such additions at this time. The cost of such additions can be significant. There can be no assurance that our capacity estimates will be achieved. Any such additions would increase our
operating spending, increase our capital requirements and reduce our resources available for development activities.

We have removed our Imagify manufacturing equipment from the facilities of our third party contract manufacturer and currently have no facility within
which to manufacture Imagify until the new commercial manufacturing facility is qualified or until other arrangements are made.

We have removed our Imagify manufacturing equipment from the facilities of a third-party contract manufacturer. Currently, we have no facility within which to
manufacture Imagify until the new commercial manufacturing facility is qualified or until other arrangements are made. We have no existing inventory of Imagify on-hand and would need to
produce additional material for future clinical trials. If we lack sufficient inventory of Imagify clinical trial material to perform clinical trials or are unable to manufacture sufficient inventory
on a timely basis, our program could be adversely impacted

49

---



or
delayed. These delays could have a material adverse effect on our business, financial condition and results of operations.

If third-party manufacturers of our products candidates fail to devote sufficient time and resources to our concerns, or if their performance is
substandard, our clinical trials may be delayed and our costs may rise.

We may rely substantially on third-party contract manufacturers to supply, store and distribute our product candidates for our clinical trials and other
development needs. Our reliance on these third-party manufacturers will expose us to the following risks, any of which could delay or prevent the completion of our clinical trials, the approval of our
products by FDA, or the commercialization of our products, result in higher costs, or deprive us of additional product candidates, and any of such effects would have a material adverse impact on our
business, financial condition and results of operations.



Drug
manufacturers are subject to ongoing periodic unannounced inspection by FDA and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government
regulations and corresponding foreign standards. While we are obligated to audit the performance of third party contractors, we do not have control over our third-party manufacturers' compliance with
these regulations and standards. Failure by our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of the government to grant market approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions,
any of which could significantly and adversely affect our business.

Materials necessary to manufacture our products may not be available, which may delay our development and commercialization activities.

Only a few facilities manufacture some of the raw materials necessary to manufacture our products. If we need to purchase a raw material that is in limited supply
for our clinical trials, or for commercial distribution if we obtain marketing approval of a product candidate, we cannot assure you

50

---



that
one or more suppliers would be able to sell us that raw material at the time we need it and on commercially reasonable terms. If we change suppliers for any of these materials or any of our
suppliers experiences a shutdown or disruption in the facilities used to produce these materials, due to technical, regulatory or other problems, it could harm our ability to manufacture our products
or receive regulatory approval.

We have no experience selling, marketing or distributing our products and no internal capability to do so.

If we receive regulatory approval to commence commercial sale of any product, we will face competition with respect to commercial sales, marketing and
distribution. These are areas in which we have no experience. To market any of our products directly, we must develop a direct marketing and sales force with technical expertise and supporting
distribution capability. Alternatively, we may engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales force to assist us. There can be no assurance
that we will successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our products. To the extent we have or
will enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties and there can be no assurance that our efforts will succeed.

Our potential product trade names may not be acceptable to FDA.

FDA reserves the right to approve product names prior to commercialization. We have proposed to FDA the tradename Imagify, as well as an alternative tradename, as
a potential product trade name for our lead product. FDA has raised concerns regarding the name Imagify which, if not resolved, could cause us to use the alternative name which they find acceptable.
Trade names changes could result in additional cost to us and could adversely affect our preparations for commercialization of this product which could adversely affect our business, financial
condition and results of operations.

Claims by other parties that we infringe or have misappropriated their proprietary technology may result in liability for damages, royalties, or other
payments, or stop our development and commercialization efforts.

Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents
that may be granted in the future. Many of our competitors have obtained patents covering products and processes generally related to our products and processes, and they may assert these patents
against us. Moreover, there can be no assurance that these competitors have not sought or will not seek additional patents that may cover aspects of our technology. As a result, there is a greater
likelihood of a patent dispute than would be expected if our competitors were pursuing unrelated technologies.

While
we conduct patent searches to determine whether the technologies used in our products infringe patents held by third parties, numerous patent applications are currently pending and
may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent
uncertainty in conducting patent searches, there can be no guarantee that we will not violate third-party patent rights that we have not yet identified.

We
know of U.S. and foreign patents issued to third parties that relate to aspects of our product candidates. There may also be patent applications filed by these or other parties in the
United States and various foreign jurisdictions that relate to some aspects of our product candidates, which, if issued, could subject us to infringement actions. In particular, we are aware of U.S.
and foreign patents owned by third parties, including potential competitors, which arguably cover aspects of our Imagify imaging agent. We and several of these parties have been actively engaged in
opposing the grant of European patents with claims that arguably cover aspects of our Imagify product. Parties may contest patents in Europe prior to contesting the counterpart patents in the United
States because of procedural differences between European and U.S. patent laws as well as economic considerations.

51

---





The owners or licensees of these and other patents may file one or more infringement actions against us. In addition, a competitor may claim misappropriation of a trade secret by an
employee hired from that competitor. Any such infringement or misappropriation action could cause us to incur substantial costs defending the lawsuit and could distract our management from our
business, even if the allegations of infringement or misappropriation are unwarranted. A need to defend multiple actions or claims could have a disproportionately greater impact. In addition, either
in response to or in anticipation of any such infringement or misappropriation claim, we may enter into commercial agreements with the owners or licensees of these rights. The terms of these
commercial agreements may include substantial payments, including substantial royalty payments on revenues received by us in connection with the commercialization of our products. Payments under such
agreements could increase our operating losses and reduce our resources available for development activities. Furthermore, a party making this type of claim could secure a judgment that requires us to
pay substantial damages, which would increase our operating losses and reduce our resources available for development activities. A judgment could also include an injunction or other court order that
could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products. If a court determined or if we independently concluded that
any of our products or manufacturing processes violated third-party proprietary rights, our clinical trials could be delayed and there can be no assurance that we would be able to reengineer the
product or processes to avoid those rights, or to obtain a license under those rights on commercially reasonable terms, if at all.

If we are unable to protect our intellectual property rights, our competitors may develop and market products with similar features that may reduce
demand for our products, and we may be prevented from establishing collaborative relationships on favorable terms.

The
following factors are important to our success:



We
will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or
are effectively maintained as trade secrets.

We
try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the
development of our business. Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted
with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending
patent applications, those we may file in the future, or those we may license from third parties, may not result in patents being issued. If issued, they may not provide us with proprietary protection
or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. The laws
of many foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States.

We
also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We try to protect this information by
entering into confidentiality agreements with parties that have access to it, such as our corporate partners, collaborators, employees and consultants. Any of these parties may breach the agreements
and disclose our confidential

52

---



information
or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or
independently developed by a competitor, our business and financial condition could be materially adversely affected.

We may become involved in lawsuits and administrative proceedings to protect, defend or enforce our patents that would be expensive and time consuming.

In order to protect or enforce our patent rights, we may initiate patent litigation against third parties in the United States or in foreign countries. In
addition, we have been and continue to be subject to certain opposition proceedings conducted in patent and trademark offices challenging the validity of our patents and may become involved in future
opposition proceedings. The defense of intellectual property rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings
can be costly and can divert our technical and management personnel from their normal responsibilities. Such costs increase our operating losses and reduce our resources available for development
activities. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.

Furthermore,
because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could
be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation and despite protective orders entered by the court, confidential information may
be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could materially adversely affect our business
and financial results.

If we are unable to retain key personnel and hire additional qualified scientific, manufacturing, sales and marketing, and other personnel, we may not
be able to successfully achieve our goals.

We depend on the principal members of our scientific and management staff. The loss of these principal members' services might significantly delay or prevent the
achievement of research, development or business objectives and could materially adversely affect our business, financial condition and results of operations. We do not maintain key person life
insurance on any of these principal members except for the CEO. We have entered into executive employment agreements with key members of the management team that provide for compensation and other
benefits in the event these persons are terminated other than for cause, including in connection with a "change of control" of Acusphere.

Our
success depends, in large part, on our ability to attract and retain qualified scientific and management personnel such as these individuals. We face intense competition for such
personnel and consultants. We cannot assure you that we will attract and retain qualified management and scientific personnel in the future.

Further,
we expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, commercial
manufacturing and marketing, will
place additional requirements on our management, operational and financial resources. We expect these demands will require an increase in management and scientific personnel and the development of
additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could materially adversely affect prospects for our success.

We will establish collaborative relationships, and those relationships may expose us to a number of risks.

We will rely on a number of significant collaborative relationships with pharmaceutical or other healthcare companies for our manufacturing, research funding,
clinical development and/or sales and

53

---



marketing
performance. Reliance on collaborative relationships poses a number of risks, including the following:



In
July 2004, we entered into a collaboration, license and supply agreement with Nycomed in which we granted Nycomed rights to develop and market Imagify in Europe. There can be
no assurance that the regulatory goals, sales targets and other objectives of this agreement will be achieved. Failure to achieve these goals, targets and objectives would result in our inability to
receive license, milestone, royalty and other payments under this agreement, which would have a material adverse impact on our business, financial condition and results of operations including, under
certain conditions, reduction of royalty rates, delays in regulatory approvals and product sales, penalties and termination of the agreement. Under certain provisions of this collaboration agreement,
if we fail in any material respect to use all commercially reasonable efforts to carry out referenced obligations under the agreement, we would be obligated to pay Nycomed liquidated damages of up to
$12 million. Although we plan to carry out all of these obligations, which we believe are in our control, there can be no assurance that termination of this agreement will not occur or that
such termination would not result in us incurring liquidated damages of up to $12 million.

Given
these risks, our current and future collaborative efforts may not be successful. Failure of these efforts could delay our product development or impair commercialization of our
products, and could have a material adverse effect on our business, financial condition and results of operations.

Competition in the pharmaceutical industry is intense, and if we fail to compete effectively our financial results will suffer.

We engage in a business characterized by extensive research efforts, rapid developments and intense competition. We cannot assure you that our products will
compete successfully or that research and development by others will not render our products obsolete or uneconomical. Our failure to compete effectively would materially adversely affect our
business, financial condition and results of operations. We expect that successful competition will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope
of regulatory approval and price. Specifically, we expect important factors will include the relative speed with which we can develop products, complete the clinical, development and laboratory
testing and regulatory approval processes and supply commercial quantities of the product to the market.

We
expect competition to increase as technological advances are made and commercial applications broaden. In commercializing our initial product candidates and any additional products we
develop using our HDDS and PDDS technologies, we will face substantial competition from large pharmaceutical, biotechnology and other companies, universities and research institutions.

54

---





Relative
to us, most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and
obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than we
will. Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to

55

---



gain
a competitive advantage. Finally, our competitors may use different technologies or approaches to the development of products similar to the products we are seeking to develop.

We expect to develop international operations that will expose us to additional business risks.

We expect, whether directly or through collaborative relationships, to develop operations outside the United States in order to market and distribute our
products. Regardless of the extent to which we seek to develop these operations ourselves or in collaboration with others, we cannot be sure that our international efforts will be successful. Any
expansion into international markets will require additional resources and management attention and will subject us to new business risks. These risks could lower the prices at which we can sell our
products or otherwise have an adverse effect on our operating results. Among the risks we believe are most likely to affect any international operations are:



Risks Related to Our Industry

Even if we obtain marketing approval, our products will be subject to ongoing regulatory review.

If regulatory approval of a product is granted, such approval may be subject to limitations on the indicated uses for which the product may be marketed or contain
requirements for costly, post-marketing follow-up studies. As to products for which marketing approval is obtained, the manufacturer of the product and the manufacturing
facilities will be subject to continual review and periodic inspections by FDA and other regulatory authorities. In addition, the labeling, packaging, adverse event reporting, storage, advertising,
promotion and record keeping related to the product will remain subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product, manufacturer or
facility may result in restrictions on the product or the manufacturer, including withdrawal of the product from the market. We may be slow to adapt, or we may never adapt, to changes in existing
requirements or adoption of new requirements or policies.

If
we fail to comply with applicable regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.

Market acceptance of our products will be limited if users of our products are unable to obtain adequate reimbursement from third-party payors.

Government health administration authorities, private health insurers and other organizations generally provide reimbursement for products like our product
candidates, and our commercial success will depend in part on these third-party payors agreeing to reimburse providers for the costs of our products. Even if we succeed in bringing any of our proposed
products to market, we cannot assure you that third-party payors, in the United States, Europe and other markets that we may pursue, will consider our products cost-effective or provide
reimbursement in whole or in part for their use or agree to the proposed price.

56

---



Significant
uncertainty exists as to the reimbursement status of newly approved health care products. Each of our product candidates is intended to replace or alter existing therapies or
procedures. These third-party payors may conclude that our products are less safe, effective or cost-effective than these existing therapies or procedures. Therefore, third-party payors
may not approve our products for reimbursement.

If
third-party payors do not approve our products for reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients will opt for a competing
product that is approved for reimbursement or is adequately reimbursed. Even if third-party payors make reimbursement available, these payors' reimbursement policies may adversely affect the ability
of us and our potential collaborators to sell our products on a profitable basis.

Moreover,
the trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare
and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our products which could adversely
affect our business, financial condition and results of operations.

In
addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us before or after FDA or other regulatory agencies approve any of our
proposed products for marketing. While we cannot predict the likelihood of any of these legislative or regulatory proposals, if any government or regulatory agencies adopt these proposals they could
materially adversely affect our business, financial condition and results of operations.

We may be required to defend lawsuits or pay damages in connection with the alleged or actual harm caused by our products or product candidates.

We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in harm to others.
This risk exists in clinical trials as well as in commercial distribution. In addition, the pharmaceutical and biotechnology industries in general have been subject to significant medical malpractice
litigation. We may incur significant liability if product liability or malpractice lawsuits against us are successful. Furthermore, product liability claims, regardless of their merits, could be
costly and divert our management's attention from other business concerns, or adversely affect our reputation and the demand for our products. Although we maintain product liability insurance, we
cannot be certain that this coverage will be adequate or that it will continue to be available to us on acceptable terms.

Rapid technological change could make our products obsolete.

Pharmaceutical technologies have undergone rapid and significant change. We expect that pharmaceutical technologies will continue to develop rapidly. Our future
will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any compounds, products or processes that we develop may become obsolete before we
recover any expenses incurred in connection with their development. Rapid technological change could make our products obsolete, which could materially adversely affect our business, financial
condition and results of operations.

Our products involve the use of hazardous materials, and as a result we are exposed to potential liability claims and to costs associated with complying
with laws regulating hazardous waste.

Our research and development activities involve the use of hazardous materials, including chemicals and biological materials. We believe that our procedures for
handling hazardous materials comply with federal and state regulations. However, there can be no assurance that accidental injury or contamination from these materials will not occur. In the event of
an accident, we could be held liable

57

---



for
any damages, which could exceed our available financial resources. This liability could materially adversely affect our business, financial condition and results of operations.

We
are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products, and we spent
approximately $10,493 during the nine months ended September 30, 2007 to dispose of these hazardous materials and waste products. We may be required to incur significant costs to comply with
environmental laws and regulations in the future that could materially adversely affect our business, financial condition and results of operations.

Risks Related to Our Common Stock

We expect that our stock price will fluctuate significantly.

The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks. An
active public market for our common stock may not continue to develop or be sustained. The volatility of pharmaceutical and biotechnology stocks and the level of trading in the stock does not always
relate to the operating performance of the companies represented by the stock. Factors that could cause this volatility in the market price of our common stock include:



The
market price of our common stock may also fluctuate in response to the exercise by us of rights under the terms of our 6.5% convertible exchangeable preferred stock. For example, we
may elect to automatically convert the preferred stock if our common stock price has exceeded 150% of the conversion price of the preferred stock for at least 20 trading days during a
30-day trading period ending within five trading days prior to the notice of automatic conversion. There is a risk of fluctuation in the price of our common stock between the time when we
may first elect to automatically convert the preferred stock and the automatic conversion date. These fluctuations may adversely affect the value of our common stock.

If shares under our universal shelf registration statement are issued, then the price of our securities may be negatively affected.

We have on file with the SEC a universal shelf registration statement on Form S-3 (Registration No. 333-134263) and a
universal shelf registration statement on Form S-3 (Registration No. 333-123854), which provide for the offer, from time to time, of common stock, preferred
stock, debt securities and warrants up to an aggregate remaining availability of approximately $3.5 million and $27.3 million, respectively, net of financing amounts previously executed
under these registration statements and amounts reserved for up to $30.0 million in potential financing under the equity line of credit arrangement we entered into in August 2006 with
Azimuth Opportunity, Ltd, which expires in

58

---



February 2008.
The SEC declared the shelf registration statements effective on August 18, 2006 and April 15, 2005, respectively. Subject to market conditions and our capital
needs, and so long as we are then eligible to use the registration statements under SEC rules, we may again seek to use any remaining availability under the shelf registration statements by making an
offering of securities covered for sale under the registration statements. In addition, we may amend our shelf registration statements or file a new shelf registration statement to increase our
potential access to capital. The addition of these securities into the market may be dilutive to existing stockholders and have an adverse effect on the price of our securities.

If we sell shares of our common stock under our equity line of credit arrangement, then the price of our securities may be negatively affected.

In August 2006, we entered into what is sometimes termed an equity line of credit arrangement with Azimuth Opportunity Ltd. The arrangement provides
that, upon the terms and subject to the conditions set forth therein, Azimuth is committed to purchase up to $30.0 million of our common stock, or up to approximately 5.8 million shares
of common stock, whichever occurs first, over the 18-month term of the agreement. From time to time during the term of the agreement, and at our sole discretion, we may present Azimuth
with draw down notices requiring Azimuth to purchase our common stock. The per share purchase price for these shares will equal the daily volume weighted average price of the common stock on each date
during the draw down period on which shares are purchased, less a discount ranging from 3.875% to 5.875%, based on the volume weighted average price of the common stock. As a result, our existing
common stockholders will experience immediate dilution upon the purchase of any shares of our common stock by Azimuth under this agreement. The sale of shares under this equity line will be dilutive
to existing stockholders and may have an adverse effect on the price of our securities.

Our significant equity holders may have conflicts of interests with us or you in the future.

As of November 5, 2007, and based on information provided to us by such entities: Quaker Capital Management Corporation and their respective affiliates
beneficially own approximately 7% of our outstanding common stock; Bank of America Corporation, Columbia Management Advisors, and their respective affiliates beneficially own approximately 6% of our
outstanding common stock; the Endowment Capital Group LLC and its affiliates beneficially own approximately 6% of our outstanding common stock; MLM Partners and its respective affiliates beneficially
own approximately 5% of our outstanding common stock; Deutsche Bank AG beneficially owns approximately 5% of our outstanding common stock;and each of
the Baupost Group LLC, Meditor Group LLC, and their respective affiliates own approximately 4% of our common stock.Collectively these investors will
control approximately 37% of our outstanding common stock. These investors, particularly if they were to act together as a concentrated group, could exert influence over the election of our directors,
direct our policies and operations, including future issuances of common stock or other securities, the payments of dividends, if any, on our common stock, the incurrence of debt by us, amendments to
our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and entering into of extraordinary transactions, and their interests, as a concentrated group, may not in all
cases be aligned with your interests. This concentration of ownership among a small number of investors may make it more difficult for other stockholders to influence matters requiring stockholder
approval and may have the effect of delaying, preventing or deterring a change in control of our company, thereby possibly depriving our stockholders of an opportunity to receive a premium for their
common stock as part of any sale or acquisition.

59

---



Our common stock is junior to our preferred stock with respect to the right to receive payments in the event of a dissolution, liquidation or winding up
of Acusphere.

In February 2005, we issued and sold 900,000 shares of our 6.5% convertible exchangeable preferred stock. As of November 5, 2007, 690,000 of these
shares of preferred stock are outstanding. The preferred stock is senior to the common stock as to liquidation. In the event of our voluntary or involuntary dissolution, liquidation or winding up of
Acusphere, holders of our preferred stock will receive a liquidation preference in an amount equal to $50 per share, plus all accrued and unpaid dividends through the distribution date. Only after
holders of the preferred stock have received their liquidation preference and any accrued and unpaid dividends will we distribute assets, if any are remaining, to our common stock holders.

Acusphere could be the subject of securities class action litigation due to future stock price volatility.

In the past, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the
company that issued the stock. The market price of our common stock has been historically volatile and may remain volatile. Such volatility in our stock price could result in shareholder litigation
against us. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

Future sales of common stock by our existing stockholders may cause our stock price to fall.

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the perception
that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate. As of November 5, 2007, we have
approximately 46,273,945 shares of common stock outstanding and 690,000 shares of convertible preferred stock outstanding that are convertible into approximately 5.0 million shares of our
common stock, plus up to a maximum of approximately 0.6 million additional shares of our common stock issuable at our option in satisfaction of the maximum dividend make-whole
payment on these shares of preferred stock. All of the shares of common stock issuable upon conversion of our preferred stock will be freely tradable without restriction under the federal securities
laws unless purchased by our affiliates.

The terms of our outstanding shares of preferred stock may restrict our ability to raise additional capital or hamper or prevent an acquisition of us.

In February 2005, we issued and sold 900,000 shares of our 6.5% convertible exchangeable preferred stock. As of November 5, 2007, 690,000 of these
shares of preferred stock are outstanding. In the event of our voluntary or involuntary dissolution, liquidation or winding up of Acusphere, holders of our preferred stock will receive a liquidation
preference in an amount equal to $50 per share, plus all accrued and unpaid dividends through the distribution date. Only after holders of the preferred stock have received their liquidation
preference and any accrued and unpaid dividends will we distribute assets, if any are remaining, to our common stock holders. Without the vote or consent of the holders of at least a majority of the
shares of preferred stock, we can not authorize or sell any equity security that ranks senior to the preferred stock as to dividends or distributions of assets upon liquidation, dissolution or winding
up of Acusphere. As a result of this liquidation preference, it may be difficult for us to raise additional capital through the sale of common stock or junior preferred stock on acceptable terms, or
at all.

In
addition, without the vote or consent of the holders of at least a majority of the shares of preferred stock we may not effect a consolidation or merger with another entity unless the
preferred stock that remains outstanding and its rights, privileges and preferences are unaffected or are converted

60

---



into
or exchanged for preferred stock of the surviving entity having rights, preferences and limitations substantially similar, but no less favorable, to the convertible preferred stock. This
provision could hamper a third party's acquisition of us or discourage a third party from attempting to acquire control of us via a merger.

Under some circumstances, the holders of our outstanding shares of preferred stock may be entitled to elect some of the directors of Acusphere.

In February 2005 we issued and sold 900,000 shares of our 6.5% convertible exchangeable preferred stock. As of November 5, 2007, 690,000 of these
shares of preferred stock are outstanding. Cumulative dividends accrue on our preferred stock at an annual rate of $3.25 per share, payable quarterly on the first day of March, June, September and
December, commencing June 1, 2005. Any dividends must be declared by our board of directors and must come from funds that are legally available for dividend payments. If we have not paid
dividends on the preferred stock in an aggregate amount equal to at least six quarterly dividends whether or not consecutive, we must increase the size of our board of directors by two additional
directors. After this time, and for so long as these dividends remain due and unpaid, holders of the preferred stock, voting separately as a class with holders of preferred stock ranking on the same
basis as to dividends having like voting rights, will be entitled to elect two additional directors at any meeting of stockholders at which directors are to be elected. These directors will be
appointed to classes on the board as determined by our board of directors. These voting rights will terminate when we have declared and either paid or set aside for payment all accrued and unpaid
dividends. The terms of office of all directors so elected will terminate immediately upon the termination of these voting rights.

Provisions of Delaware law or our charter documents could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our
stockholders, and could make it more difficult for you to change management.

Provisions of Delaware law or our charter or by-laws could hamper a third party's acquisition of us, or discourage a third party from attempting to
acquire control of us. Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock. Further, these provisions make it more difficult for stockholders to change the composition of our board of directors in any one year.

These
provisions include:



61

---





We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

We have paid no cash dividends on our common stock to date and, other than cash dividends paid on our preferred stock, we currently intend to retain our future
earnings, if any, to fund the development and growth of our businesses. In addition, the terms of any future debt or credit facility may preclude us from paying these dividends. As a result, capital
appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

Our policy governing transactions in its securities by its directors, officers and employees permits its officers, directors and certain other persons to enter
into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been
advised that, in accordance with Rule 10b5-1 and our policy governing transactions in its securities, such a plan has been entered into with provisions requiring that any trading of
securities thereunder is to be reported when and if it occurs in accordance with applicable law. We undertake no obligation to update or revise the information provided herein, including for revision
or termination of an established trading plan.

ITEM 6. EXHIBITS

|Exhibit
Number |  | Exhibit Description                     
|-------------- |  | ----------------------------------------
|31.1*          |  | Rule 13a-14(a) / 15d-14(a) Certification
|31.2*          |  | Rule 13a-14(a) / 15d-14(a) Certification
|32.1*          |  | Section 1350 Certifications             

---

62

---





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized on this 8th day of November 2007.

| |  | ACUSPHERE, INC.
| |  | ---------------
| |  | By:            
| |  | By:            

63

---



EXHIBIT INDEX

|Exhibit
Number |  | Exhibit Description                     
|-------------- |  | ----------------------------------------
|31.1*          |  | Rule 13a-14(a) / 15d-14(a) Certification
|31.2*          |  | Rule 13a-14(a) / 15d-14(a) Certification
|32.1*          |  | Section 1350 Certifications             

---

---